As filed with the Securities and Exchange Commission on January 29, 1997
-------------------------------
Registration No. 333-17767
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO.1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
NICHE PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 2834 75-2376714
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification Number)
incorporation or
organization)
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Telephone: (817)491-2770
Telecopier: (817)491-3533
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
-------------------------
Stephen F. Brandon, President
NICHE PHARMACEUTICALS, INC.
200 North Oak
P.O. Box 449
Roanoke, Texas 76262
Telephone: (817) 491-2770
Telecopier: (817) 491-3533
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Fred Skolnik, Esq. Ilan K. Reich, Esq.
Gavin C. Grusd, Esq. Olshan Grundman Frome & Rosenweig LLP
Certilman Balin Adler & Hyman, LLP 505 Park Avenue
90 Merrick Avenue New York, NY 10022
East Meadow, NY 11514 Telephone: (212) 753-7200
Telephone: (516) 296-7000 Telecopier: (212) 755-1467
Telecopier: (516) 296-7111
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of the registration statement.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
[Cover continued on next page.]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Titles of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------
Common Shares (3) 1,495,000 $5.00 $7,475,000 $2,265.15
Underwriter's Common Share
Purchase Warrants (4) 130,000 --- $ 100 ---
Common Shares (5) 130,000 $7.50 $ 975,000 $295.45
Common Shares (6) 100,000 $5.00 $ 500,000 $151.50
--------------
Total Registration Fee: $2,712.10[7]
==========================================================================================================
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended
("Securities Act"), this Registration Statement covers such additional
indeterminate number of Common Shares and Underwriter's Common Stock
Purchase Warrants (the "Underwriter's Warrants") as may be issued by reason
of adjustments in the number of shares of Common Stock and Underwriter's
Warrants pursuant to antidilution provisions contained in the Underwriter's
Warrants. Because such additional shares of Common Stock and Underwriter's
Warrants will, if issued, be issued for no additional consideration, no
registration fee is required.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes 195,000 Common Shares subject to the Underwriter's overallotment
option.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Warrants.
(6) Registered on behalf of selling stockholder.
(7) $2,653.01 of the registration fee was paid with the original filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1997
PROSPECTUS
Niche Pharmaceuticals, Inc.
1,300,000 Shares of Common Stock, par value $.01 per share
Offering Price Per Share - $5.00
---------------
Niche Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
hereby offers 1,300,000 shares of common stock, par value $.01 per share (the
"Common Shares"). See "Risk Factors" and "Description of Securities." The "Risk
Factors" section begins on page 6 of this Prospectus.
The Company has applied for inclusion of the Common Shares on The
Nasdaq SmallCap Market, although there can be no assurances that an active
trading market will develop even if the securities are accepted for quotation.
See "Risk Factors - Lack of Prior Market for Common Shares; No Assurance of
Public Trading Market" and "Risk Factors - Penny Stock Regulations May Impose
Certain Restrictions on Marketability of Securities".
Prior to this offering (the "Offering"), there has been no public
market for the Common Shares. It is currently anticipated that the initial
public offering price will be $5.00 per Common Share. The price of the Common
Shares has been determined by negotiations between the Company and Sterling
Foster & Co., Inc., the underwriter of this Offering (the "Underwriter"), and
does not necessarily bear any relationship to the Company's assets, book value,
net worth or results of operations or any other established criteria of value.
The Underwriter may enter into arrangements with one or more broker-dealers to
act as co-underwriters of this Offering. The Underwriter has agreed, but is not
obligated, to act as a market maker for the Company's Common Shares.
Although the Company anticipates that there will be additional market makers
for the Company's Common Shares, it has not identified any as of the date of
this Prospectus. For additional information regarding the factors considered in
determining the initial public offering price of the Common Shares, see "Risk
Factors - Arbitrary Offering Price; Possible Volatility of Stock Price", "Risk
Factors - Lack of Prior Market for Common Shares; No Assurance of Public
Trading Market", "Description of Securities" and "Underwriting".
The registration statement of which this Prospectus forms a part also
covers the resale of 100,000 Common Shares issued to a certain unaffiliated
bridge lender (the "Selling Stockholder"). The Company will not receive any of
the proceeds from the resale of the Common Shares by the Selling Stockholder.
The Common Shares held by the Selling Stockholder may be resold at any time
following the date of this Prospectus, subject to an agreement with the
Underwriter restricting the transfer of such Common Shares for a period of two
years without the Underwriter's consent. The resale of the Common Shares by the
Selling Stockholder is subject to Prospectus delivery and other requirements of
the Securities Act of 1933, as amended (the "Act"). Sales of such Common Shares
or the potential of such sales at any time may have an adverse effect on the
market price of the Common Shares offered hereby. See "Principal and Selling
Stockholders" and "Risk Factors - Shares Eligible for Future Sale May Adversely
Affect the Market."
----------------
[Cover Continued on Next Page]
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK
VALUE OF THE COMMON SHARES OFFERED HEREBY AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Discounts Proceeds to
to Public and Commissions (1) Company (2)
Per Share.......... $5.00 $0.50 $4.50
Total (3).......... $6,500,000 $650,000 $5,850,000
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $195,000
($224,250 if the Overallotment Option (as hereinafter defined) is
exercised in full), (ii) a three year financial advisory and investment
banking agreement providing for aggregate fees of $100,000 payable in
advance at the closing of this Offering, and (iii) a warrant (to be
purchased by the Underwriter for $100) to purchase 130,000 Common Shares
(10% of the total number of Common Shares sold pursuant hereto) (the
"Underwriter's Warrant"), exercisable for a period of three years,
commencing one year from the date of this Prospectus. The Company and
the Underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Act. The Company has
been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is
therefore unenforceable. See "Underwriting".
(2) Before deducting expenses of the Offering payable by the Company
estimated at $610,000, including the Underwriter's non-accountable
expense allowance and financial advisory fee referred to in footnote
(1) (not assuming exercise of the Overallotment Option), registration
fees, transfer agent fees, NASD fees, Blue Sky filing fees and
expenses, legal fees and expenses, and accounting fees and expenses.
See "Use of Proceeds" and "Underwriting."
(3) Does not include 195,000 additional Common Shares to cover overallotments
which the Underwriter has an option to purchase for 45 days from the date
of this Prospectus at the initial public offering price, less the
Underwriter's discount (the "Overallotment Option"). If the Overallotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $7,475,000,
$747,500, and $6,727,500, respectively. See "Underwriting".
---------------
[Cover Continued on Next Page]
2
The Common Shares are offered by the Underwriter on a "firm
commitment" basis, when, as and if delivered to and accepted by the Underwriter,
and subject to prior sale, allotment and withdrawal, modification of the offer
with notice, receipt and acceptance by the Underwriter named herein and subject
to its right to reject orders in whole or in part and to certain other
conditions. It is expected that the delivery of the certificates representing
the Common Shares and payment therefor will be made at the offices of the
Underwriter on or about _________, 1997.
S T E R L I N G F O S T E R
I N V E S T M E N T B A N K E R S
The date of this Prospectus is _________, 1997.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT PORTION OF THE COMMON SHARES TO BE SOLD IN THIS
OFFERING MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITER. SUCH SALES MAY AFFECT THE
MARKET FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT
ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, AS
TO WHICH THERE CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE COMMON SHARES THROUGH AND/OR WITH
THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON SHARES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREBY MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - LACK OF PRIOR MARKET FOR COMMON SHARES;
NO ASSURANCE OF PUBLIC TRADING MARKET".
2
PROSPECTUS SUMMARY
The following is a summary of certain information (including
financial statements and notes thereto) contained in this Prospectus and is
qualified in its entirety by the more detailed information appearing elsewhere
herein. In addition, unless otherwise indicated to the contrary, the information
appearing herein does not give effect to the issuance of (a) 195,000 Common
Shares upon exercise of the Overallotment Option; (b) 130,000 Common Shares upon
exercise of the Underwriter's Warrant; or (c) 564,375 Common Shares upon the
exercise of outstanding stock options and warrants. However, all references to
Common Shares and prices per share in this Prospectus give retroactive effect to
a 1.25 for 1 stock split effectuated on October 15, 1996 as part of the
Company's reincorporation in the State of Delaware. See "Underwriting." Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
Niche Pharmaceuticals, Inc. (the "Company") manufactures through
third party contractors, and markets and distributes, non-prescription
pharmaceutical and nutraceutical dietary supplement products. The Company seeks
to exploit product niches that have generally been overlooked or neglected by
the major drug companies because of the relatively small perceived size of the
market for such products. The Company's current products are a patented,
state-of-the-art, sustained release magnesium supplement marketed under the name
Mag-Tab(R)SR, and a dietary fiber supplement marketed as Unifiber(R).
The Company markets its products to virtually all of the drug and
dietary supplement wholesalers in the United States which, in turn, supply
retail pharmacies, numerous state and federal institutions, and group and
managed care purchasing organizations ("GPOs") acting on behalf of hospitals,
extended care facilities and nursing homes.
The Company commenced operations in 1991 as a Texas corporation, and
was reincorporated as a Delaware corporation on October 15, 1996. The Company
maintains its executive offices at 200 North Oak, Roanoke, Texas 76262;
telephone number (817) 491-2770.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Company and its business.
The Offering
Common Shares Being Offered 1,300,000 shares
Common Shares Outstanding Prior to
the Offering ..................... 1,101,500 shares
Common Shares to be Outstanding
After the Offering (1)............ 2,401,500 shares
3
Use of Proceeds................... The net proceeds to the Company
from the sale of the 1,300,000
Common Shares offered hereby are
estimated to be $5,240,000. The
net proceeds are expected to be
applied in the following
approximate percentages for the
following purposes: marketing and
advertising (35.1%), hiring of
additional personnel (10.5%),
product acquisition (9.5%),
repayment of indebtedness (7.7%),
research and development (5.7%) and
working capital (31.5%). See "Use
of Proceeds".
Risk Factors...................... An investment in the securities
offered hereby involves a high
degree of risk and immediate
substantial dilution of the book
value of the Common Shares and
should be considered only by
persons who can afford the loss of
their entire investment. See "Risk
Factors" and "Dilution."
Proposed Nasdaq SmallCap Market
Symbol(2)....................... NCHE
- -----------------
(1) Does not give effect to the issuance of (i) 195,000 Common Shares
upon exercise of the Overallotment Option; (ii) 130,000 Common Shares
upon exercise of the Underwriter's Warrant; or (iii) 564,375 Common
Shares upon the exercise of outstanding stock options and warrants.
See "Underwriting."
(2) Although the Company has applied for inclusion of the Common Shares
on The Nasdaq SmallCap Market, there can be no assurance that the
Company's securities will be included for quotation, or, if so
included, that the Company will be able to continue to meet the
requirements for continued quotation, or that a public trading market
will develop or, if such market develops, that it will be sustained.
See "Risk Factors - Lack of Prior Market for Common Shares; No
Assurance of Public Trading Market".
4
Summary Financial Information
The following summary financial information has been derived from the
financial statements of the Company included elsewhere in this Prospectus. The
information should be read in conjunction with the financial statements and the
related notes thereto. All amounts are in dollars except number of Common
Shares. See "Financial Statements".
Statement of Operations Data
Nine Months Ended Years Ended
September 30, December 31
--------------------- ----------------------
1996 1995 1995 1994
---- ---- ---- ----
Revenues ................... $ 906,744 $389,700 $ 606,268 $ 415,330
Gross profit ................ 564,382 303,587 423,122 279,858
Operating income ............ 77 91,905 88,181 4,508
Net income (loss) ........... (140,588) 37,767 (1,003) (62,340)
Net income (loss)
per share(1) . ............. (.13) .03 --- (.06)
Weighted average number
of Common Shares
outstanding(1)............. 1,101,500 1,101,500 1,101,500 1,101,500
Balance Sheet Data
September 30, 1996 December 31,1995
Pro Forma
Actual Pro Forma (1) As Adjusted(1)(2) Actual
------ ------------- ----------------- ---------
Working capital (deficit) $ (368,948) $ (368,948) $ 4,571,052 $ (67,504)
Total assets. . . . . . . 1,417,009 1,517,009 6,357,009 1,513,196
Total liabilities. . . . . . . 2,074,546 2,174,546 1,774,546 2,030,157
Total stockholders' equity (deficit) (657,537) (657,537) 4,582,463 (516,961)
- ----------------
(1) Adjusted to give retroactive effect to the issuance of 100,000 Common
Shares pursuant to a certain December 1996 bridge financing discussed
herein (the "Bridge Financing"). See "Bridge Financing".
(2) Adjusted to give effect of the receipt and application of the net proceeds
of approximately $5,240,000 from the sale of the Common Shares offered
hereby. See "Use of Proceeds".
5
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution and should only be
purchased by investors who can afford to lose their entire investment.
Prospective purchasers, prior to making an investment, should carefully consider
the following risks and speculative factors, as well as other information set
forth elsewhere in this Prospectus, associated with this Offering, including the
information contained in the financial statements herein.
1. Going Concern Uncertainty; No History of Earnings; Accumulated
Deficit; Working Capital Deficit and Stockholders' Deficit. The report of the
Company's independent auditors on the Company's financial statements for the
years ended December 31, 1995 and 1994 indicates that such financial statements
have been prepared assuming that the Company will continue as a going concern,
and references a note to such financial statements which states that such
financial statements have been prepared in conformity with generally accepted
accounting principles which contemplates continuation of the Company as a going
concern, and the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The note states that the ability
of the Company to continue as a going concern is dependent upon the success of
the Company's marketing efforts and its ability to obtain sufficient funding to
continue operations. The Company has suffered recurring losses since inception
and for the year ended December 31, 1995 and nine months ended September 30,
1996, the Company had a net loss of $1,003 and $140,588, respectively.
As of December 31, 1995 and September 30, 1996, the Company's accumulated
deficit totaled $617,961 and $758,549, respectively. In addition, as of December
31, 1995 and September 30, 1996, the Company had a working capital deficit of
$67,504 and $368,948, respectively. Moreover, as of December 31, 1995 and
September 30, 1996, the Company had a stockholders deficit of $516,961 and
$657,537, respectively. Further, as noted above, a substantial portion of the
Company's assets consists of intangible assets. The amortization expense with
respect thereto will have a material adverse effect upon the Company's results
of operations. There can be no assurance that the Company will be able to
operate profitably. The Company is subject to many business risks which include,
but are not limited to, unforeseen marketing and promotional expenses, potential
negative publicity with respect to the Company's industry and products, and
intense competition. Many of the risks may be beyond the control of the Company.
There can be no assurance that the Company will successfully implement its
business plan in a timely or effective manner, or that management of the Company
will be able to market and sell enough products to generate sufficient revenues
to continue as a going concern. See "Business" and "Financial Statements".
2. Dependence on Offering Proceeds; Possible Need for Additional
Financing. The Company's cash requirements have been and will continue to be
significant. The Company is dependent on the proceeds from this Offering in
order to further expand its operations. The Company intends to use $400,000,
or 7.7% of the net proceeds of this Offering, to repay certain indebtedness;
accordingly, such amount will not be available to fund future business
activities. The Company plans to increase the reach and frequency of its
advertising and marketing programs and the expansion and enhancement of its
infrastructure, including, without limitation, hiring additional personnel, and
engaging consultants for particular tasks, such as marketing and computer system
enhancement and other projects, all of which the Company has designed to be
implemented over the 18 month period following the closing date of the Offering.
Based on the foregoing, the Company believes that the net proceeds of this
Offering, together with anticipated increased revenues from operations, will be
sufficient to conduct the Company's operations for at least 18 months. In the
event that the Company's plans change, or the costs of operations prove
greater than anticipated, the Company could be required to curtail its
expansion plans or seek additional financing sooner than currently anticipated.
6
The Company believes that its operations would be restricted absent expansion.
The Company has no current arrangements with respect to additional financing and
there can be no assurance that such additional financing, if available, will be
on terms acceptable to the Company. See "Use of Proceeds" and "Management's
Discussion and Analysis Liquidity and Capital Resources".
3. NASD Complaint Against Underwriter and Others Alleging Violations
of Exchange Act and NASD Rules of Fair Practice. The Market Surveillance
Committee of the National Association of Securities Dealers Regulation, Inc.
("NASD") filed a complaint on September 18, 1996 (the "Complaint") against the
Underwriter and various individuals associated or formerly associated with the
Underwriter (collectively, the "Respondents") alleging various violations of the
Exchange Act and the NASD Rules of Fair Practice. The Complaint involves three
companies whose initial public offerings were underwritten by the Underwriter.
The Complaint alleges the use of fraudulent and manipulative devices in
connection with the distribution and sale of securities of such companies;
failure to comply with undertakings to submit various documents and information
to the NASD's Corporate Financing Department for review and receipt of unfair
and unreasonable underwriting compensation in connection with transactions
involving securities held by stockholders of such companies; fraudulent sales
practices and unauthorized transactions with customers of the Underwriter;
inadequate supervision of the activities of sales representatives relating to
the various alleged violations; and inadequate written supervisory procedures to
prevent the allegedly violative conduct. The Company has been advised by the
Underwriter that it has not yet filed an answer to the complaint and that it is
the intention of the Underwriter and, to the best of the Underwriter's
knowledge, the intention of the other Respondents to deny all material
allegations and alleged violations and to vigorously contest the proceeding. An
unfavorable outcome or resolution of the Complaint may adversely affect the
market for, and liquidity of, the Company's securities if the Underwriter is
unable to make a market in the Company's securities and other broker-dealers do
not make a market in the Company's securities.
4. Private Investigation Concerning Trading in Securities of Issuer
Underwritten by Underwriter. The Company was advised that the Securities and
Exchange Commission (the "Commission") issued an order on March 17, 1995
authorizing a private investigation concerning trading in the securities of
Lasergate Systems, Inc. The Underwriter acted as underwriter of a public
offering of securities of Lasergate Systems, Inc. in October 1994, and has acted
as a market maker of such issuer's securities since that time. An unfavorable
resolution of the Commission's investigation may adversely affect the market
for, and liquidity of, the Company's securities if the Underwriter is unable to
make a market in the Company's securities and other broker-dealers do not make a
market in the Company's securities.
5. Dependence on Key Management and Qualified Personnel. The Company
is highly dependent upon the efforts of its senior management. The loss of the
services of one or more members of the senior management could significantly
impede the achievement of development objectives. Although the Company intends
to obtain a $1,000,000 key-man insurance policy on the life of each of Stephen
F. Brandon, Chairman of the Board, Chief Executive Officer and President
7
of the Company, and Thomas F. Reed, Executive Vice President - Corporate
Development and a Director of the Company, the Company does not believe the
proceeds of any policies obtained would be adequate to compensate for the loss
of either of them. It is noted that Jean R. Sperry, a Vice President and a
director of the Company will only devote 10% of his time to the Company's
business. The Company is also highly dependent upon its ability to attract
and retain qualified key management personnel. There is always
competition for qualified personnel in the areas of the Company's activities,
and there can be no assurance that the Company will be able to continue to
attract and retain qualified personnel necessary for the development of its
existing business and its expansion into areas and activities requiring
additional expertise, such as marketing. The loss of, or failure to recruit,
managerial personnel could have a material adverse effect on the Company. In
addition, the Company relies on consultants to assist it in formulating its
research and development strategy and in conducting clinical trials of its
products. All of the Company's consultants are employed by other employers, or
are principals of other companies or professional practices, and each such
consultant may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. See
"Management".
6. Reliance on Two Products. The Company currently relies entirely on
the sales of its two products, Mag-Tab(R)SR and Unifiber(R), to produce
revenues. Revenues from the sale of Mag-Tab(R)SR and Unifiber(R) (i) for the
year ended December 31, 1995 were approximately $516,000, or 85% of revenues,
and approximately $90,000, or 15% of revenues, respectively, and (ii) for the
nine months ended September 30, 1996 were approximately $465,000, or 51.3% of
revenues, and approximately $434,000, or 47.9% of revenues, respectively.
Although the Company plans to seek other product acquisitions in the future,
sales of these two products are expected to account for all of the Company's
revenues for the foreseeable future. Certain factors, such as a decline in
market demand, no future market acceptance and increased competition for
superior or alternative products, could have a material adverse effect on the
Company's financial condition and results of operations. See "Business -
Products".
7. Dependence on Major Customers. A significant portion of the
Company's products is ultimately sold or supplied to consumers and patients
through pharmacies throughout the United States. However, the Company does not
supply these outlets directly. The Company markets its products to virtually all
of the drug and dietary supplement wholesalers in the United States which, in
turn, supply pharmacies, healthcare institutions, and GPOs acting on behalf of
healthcare institutions. For the fiscal year ended December 31, 1995 and the
nine months ended September 30, 1996, four drug and dietary supplement
wholesalers accounted for 25% and 19%; 16% and 13%; 13% and 14%; and 13% and 13%
of the Company's operating revenues, respectively. Although each of these
wholesalers currently supplies most of the pharmacies, GPOs and healthcare
institutions on a nonexclusive basis, the loss of any one of these customers
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business - Sales and Marketing".
8. No Manufacturing Capability or Experience; Dependence on Others.
The Company currently does not have facilities or personnel capable of directly
manufacturing any of its own products. The Company has no current plans to
manufacture its products and is dependent on third parties in this regard.
8
The Company has an exclusive agreement (the "Schering Agreement")
with Schering Plough, Inc. ("Schering") for the manufacture of Mag-Tab(R)SR.
Schering, a Food and Drug Administration ("FDA") regulated company, manufactures
Mag-Tab(R)SR for the Company at FDA Good Manufacturing Practices standards
("GMPs") for drug products, although, as a nutritional supplement, Mag-Tab(R)SR
is not required to comply with those standards. The Company relies solely on
Schering for the manufacture and packaging of this product. Pursuant to the
Schering Agreement, Schering supplies all raw materials and packaging
components for the production of Mag-Tab(R)SR according to the Company's
specifications, and Schering utilizes the quality control and manufacturing
processes provided by the Company. The initial term of the Schering Agreement
expires in July 1997 and is automatically renewable for successive two year
terms, unless written notice of termination is given by either party at least
one year prior to the expiration of the initial or a successive term. Neither
party has given any notice of termination. Accordingly, the expiration date of
the Schering Agreement has been extended to July 1999. The terms of the Schering
Agreement provide that, in the event of early termination by Schering, Schering
will, at the Company's request, provide the Company with a supply of
Mag-Tab(R)SR up to the total amount of product purchased by the Company in the
previous year. In the event the Schering Agreement is terminated or expires and
the Company does not renew its relationship with Schering, the Company believes,
but cannot assure, that it will be able to engage an alternative manufacturer on
comparable terms to the Schering Agreement to manufacture Mag-Tab(R)SR at drug
product GMPs levels.
The Company's Unifiber(R) product was manufactured by Dow Hickam
Pharmaceuticals Inc. ("Dow Hickam"), a subsidiary of Mylan Pharmaceuticals Inc.,
until December 31, 1996, pursuant to an agreement (the "Dow Hickam Agreement")
under which the Company acquired the rights to Unifiber(R). Pursuant to the Dow
Hickam Agreement, Dow Hickam agreed to manufacture the Unifiber(R) product
in sufficient quantity to meet the Company's projected sales needs through 1997.
Since the Dow Hickam Agreement expired, Dow Hickam is no longer manufacturing
Unifiber(R). However, the Company has a 15 month supply, based on current sales
levels, of Unifiber(R) in inventory. The Company is currently in discussions
with other third party contractors to manufacture Unifiber(R), although no
understanding or agreement has been reached with any such manufacturer at this
time. Additionally, the Company has retained a consultant to assist it in
identifying appropriate third party contract manufacturer candidates. The
Company believes, but cannot assure, that there will be no difficulty engaging
another contract manufacturer. Based on identification of, and development of
discussions with, potential third party contract manufacturers, the Company
anticipates that it will engage a third party contractor to manufacture
Unifiber(R) by the second quarter of 1997.
Although the Company's policy is to maintain an approximately three
month supply of each of Mag-Tab(R)SR and Unifiber(R) (as noted above, the
Company has a 15 month supply of Unifiber(R)), the failure to engage, or
delays in engaging, a manufacturer for either product could result in the
Company being unable to fill orders on a timely basis, or at all, resulting in
cancellation of orders, reduced sales, loss of customers, loss of goodwill, and
other events which could have a material adverse effect on the Company.
Additionally, if the Company is unable to engage a manufacturer on terms at
least as favorable as the Schering Agreement or the Dow Hickam Agreement, the
costs of goods sold may be raised, reducing profit margins. See "Business -
Manufacturing".
9. Uncertainty of Third Party Reimbursement and Product Pricing.
Although reimbursement or funding from third party healthcare payors currently
represents an immaterial portion of the Company's revenues, future profitability
of the Company may depend in part upon the availability of reimbursement or
funding from third party healthcare payors such as government programs (e.g.,
Medicaid), private insurance plans and managed care plans. The United States
Congress is considering a number of legislative and regulatory reforms that may
affect companies engaged in the healthcare industry in the United States.
Although the Company cannot predict
9
whether these proposals will be adopted or the effects such proposals may have
on its business, the existence and pendency of such proposals could have a
material adverse effect on the Company.
In addition, third party payors are continuing their efforts to
contain or reduce the cost of healthcare through various means. For example,
third party payors are increasingly challenging the prices charged for medical
and healthcare products and services. A third party payor may deny reimbursement
if it determines that a product was not used in accordance with cost-effective
treatment methods or for other reasons. There can be no assurances that Mag-Tab
(R)SR and Unifiber(R) will continue to qualify for reimbursement by Medicaid in
accordance with guidelines established by the Health Care Financing
Administration, by state government payors, or by commercial insurance carriers.
Also, the trend toward managed healthcare in the United States and the
concurrent growth of organizations, such as health maintenance organizations,
which can control or significantly influence the purchase of healthcare services
and products, as well as legislative proposals to reform healthcare or reduce
government insurance programs, may result in lower prices for pharmaceutical
products. The cost containment measures that healthcare providers are
instituting and the effect of any healthcare reform could materially adversely
affect the Company's ability to sell its products. See "Business - Third Party
Reimbursement".
10. Uncertainty of Protection of Patents and Proprietary Rights. The
Company's success will depend in part on its ability to obtain and enforce
patent protection for its patented products, preserve its trade secrets, and
operate without infringing on the proprietary rights of third parties, both in
the United States and in other countries. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and nutraceutical industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products and processes. The Company currently owns a United
States patent related to its Mag- Tab(R)SR product which will expire in March
2008, and a patent application relating to Mag-Tab(R)SR is pending in Canada.
The Unifiber(R) technology is not patentable. The trademark "Unifiber(R)" is
registered in the United States. See "Business - Patents and Proprietary
Information."
There can be no assurance that the Company will have sufficient
resources to protect its patent from infringers, that the Company will acquire
or develop additional products that are patented or patentable, or that present
or future patents will provide sufficient protection to the Company's present or
future technologies, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information, design around the Company' s current patents or future
patents, or obtain access to the Company's know-how, or that others will not
successfully challenge the validity of the Company's current patent or future
patents, or be issued patents which may prevent the sale of one or more of the
Company's products, or require licensing and the payment of significant fees
or royalties by the Company to third parties in order to enable the Company
to conduct its business. No assurance can be given as to the degree of
protection or competitive advantage any patents issued to the Company will
afford, the validity of any such patents or the Company's ability to avoid
infringing any patents
10
issued to others. Further, there can be no guarantee that any patents issued to,
or acquired or licensed by, the Company will not be infringed by the products of
others. Litigation and other proceedings involving the defense and prosecution
of patent claims can be expensive and time consuming, even in those instances in
which the outcome is favorable to the Company, and can result in the diversion
of resources from the Company's other activities. An adverse outcome could
subject the Company to significant liabilities to third parties, require the
Company to obtain licenses from third parties or require the Company to cease
any related research and development activities or sales of infringing products.
See "Business - Patents and Proprietary Rights".
11. Significant Competition. The Company is engaged in the
pharmaceutical and nutraceutical industry, which is characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including well-known companies engaged
in developing and marketing pharmaceuticals and nutraceuticals, that represent
significant competition to the Company. Existing products and therapies and
improvements thereto do and will compete directly with products the Company
manufactures and markets, and may manufacture and market in the future. Many
of the Company's competitors have substantially greater financial and
technical resources, production and marketing capabilities and experience than
does the Company.
Competitors who do not rely on third party contract manufacturers may
be able to compete more effectively on price. Additionally, other technologies
are, or may in the future become, the basis for competitive products.
Competition may increase further as a result of the potential advances from
structure-based drug design and greater availability of capital for investment
in this field. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than the Company's products or products which the Company may acquire in the
future, or that would render the Company's technology and products obsolete or
noncompetitive. See "Business - Competition".
12. Dependence on Market Acceptance of Company's Products. The
Company's continued success will depend upon broad acceptance and adoption by
physicians and dietary specialists of the Company's products and the
therapeutic benefits of such products, as well as the Company's ability to
broaden sales of its products to patients of these physicians and dietary
specialists. In order to penetrate this market more effectively, the Company
has expanded its sales and marketing activities, including targeted direct
mail, field sales activity, attendance at medical conventions and meetings,
development of product advocate programs, medical and trade journal
advertising and telemarketing. There can be no assurance that these or other
activities or programs will be successful in obtaining broader market
acceptance for the Company's products. Failure to do so could have a material
adverse effect on the Company's business. See "Business - Sales and Marketing".
13. Potential of Material Adverse Effect of Product Liability Claims
on the Company. The Company's business involves the risk of product liability
claims inherent to the pharmaceutical business. If such claims arise in the
future they could have a material adverse impact on the Company. The Company
maintains product liability insurance on an occurrence basis in the amount of
$3 million per occurrence and an aggregate amount of $3 million per policy
11
term period. The term of the policy is 12 months which is renewable for
successive 12 month periods. Additionally, the Company attempts to reduce its
risk by obtaining indemnity undertakings with respect to such claims from the
third party contract manufacturers of its products. There is no assurance
that such coverage or indemnification will be sufficient to protect the
Company from product liability claims, or that product liability insurance
will be available to the Company at reasonable cost, if at all, in the future.
Currently, there are no pending or threatened claims known to the Company. See
"Business - Product Liability Insurance; Indemnification".
14. Possible Significant Impact of Consumer Laws and Government
Regulation on the Company's Business and Products. The Company is subject
to the Federal Food, Drug and Cosmetics Act (including the Dietary Supplement
Health and Education Act of 1994), the Federal Trade Commission Act, the Fair
Packaging and Labeling Act, the Consumer Product Safety Act, the Federal
Hazardous Substance Act and product safety laws in foreign jurisdictions as well
as to the jurisdiction of the Consumer Product Safety Commission. Such
regulation subjects the Company to the possibility of requirements of repurchase
or recall of products found to be defective and the possibility of fines,
penalties, seizure of its products, injunction, and criminal prosecution for
repeated violations of the law. The FDA regulates product labeling, including
product claims. The Federal Trade Commission ("FTC") also regulates product
claims made in advertising. Existing and future government regulations could
impact certain products of the Company. Additionally, products which the Company
may acquire in the future (if any) may be subject to FDA approval and
regulation, which could be time consuming and costly. See "Business - Government
Regulation".
15. Risks Attendant to Expansion. The Company intends to utilize a
significant portion of the net proceeds of this Offering to expand its business.
In this regard, the Company intends to allocate a substantial portion of the
net proceeds for the following purposes: approximately $1,840,000, or 35.1% of
the net proceeds, to market and advertise the Company's products,
approximately $500,000, or 9.5% of the net proceeds, to acquire new products
and approximately $1,650,000, or 31.5% of the net proceeds, for working capital,
including general administrative costs. Many of the risks of expansion may
be unforeseeable or beyond the control of management. At present the Company
has not identified any product acquisition candidates, and it does not have any
current plans, proposals or arrangements with respect to any acquisitions;
however, it is actively seeking such candidates. There can be no assurance
that the Company will successfully implement its business plan in a timely or
effective manner, or that the Company will be able to generate sufficient
revenue to continue as a going concern. Furthermore, there can be no assurance
that the Company will identify any acquisition candidates or, if it does, that
it will be able to reach any agreements to acquire such products on terms
acceptable to the Company. To the extent that the Company may enter into any
agreements with related parties in the future (of which none are presently
contemplated), the Company anticipates that the terms of such agreements will be
commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties. Additionally, the Company intends
that such agreements will be approved by a majority of disinterested directors.
See "Use of Proceeds" and " Business - General".
16. Control by Existing Management and Stockholders; Effect of
Certain Anti-Takeover Considerations. Upon completion of the Offering, the
Company's directors, executive officers and certain principal stockholders and
their affiliates will own beneficially approximately 42% of the Common Shares
(without giving effect to the exercise of the Overallotment Option).
Accordingly, such holders, if acting together, may have the ability to exert
significant influence over the election of the Company's Board of Directors and
other matters submitted to the Company's stockholders for approval. The voting
power of these holders may discourage or prevent any proposed takeover of the
Company unless the terms thereof are approved by such holders. Pursuant to the
Company's Certificate of Incorporation, Preferred Shares may be issued by the
Company in the future without stockholder approval and upon such terms as the
Board of Directors may determine. The rights of the holders of Common Shares
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Shares that may be issued in the future. The issuance of
Preferred Shares
12
could have the effect of discouraging a third party from acquiring a majority of
the outstanding Common Shares of the Company and preventing stockholders from
realizing a premium on their Common Shares. The Certificate of Incorporation
also provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors and certain provisions of the Company's by-laws and
of Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. See "Management",
"Principal and Selling Stockholders" and "Description of Securities".
17. Management's Broad Discretion in Application of Proceeds. The
Company intends to use the net proceeds of this Offering as described in the
"Use of Proceeds" section of this Prospectus for the following purposes:
approximately $1,840,000, or 35.1% of the net proceeds, to market and advertise
the Company's products, approximately $550,000, or 10.5% of the net proceeds, to
hire additional personnel, approximately $500,000, or 9.5% of the net proceeds,
to acquire new products, approximately $400,000, or 7.7% of the net proceeds, to
repay indbtedness (including approximately $295,487, or 5.6% of the net
proceeds, to repay a loan to Mr. Brandon),approximately $300,000, or 5.7% of the
net proceeds, for reasearch and development, and approximately $1,650,000, or
31.5% of the net proceeds, for working capital. However, management of the
Company has broad discretion to adjust the application and allocation of
such net proceeds in order to address changed circumstances and opportunities,
including, without limitation, the possible acquisition of additional products
which the Company has not yet identified. As a result of the foregoing, the
success of the Company will be substantially dependent upon the discretion
and judgment of the management of the Company with respect to the application
and allocation of the net proceeds of this Offering. Pending use of the
proceeds, the funds will be invested in certificates of deposit, high grade
commercial paper and government securities or other low risk investments. See
"Use of Proceeds".
18. Arbitrary Offering Price; Possible Volatility of Stock Price. The
initial public offering price of the Common Shares was determined by negotiation
between the Company and the Underwriter, may not be indicative of the market
price for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Among the
factors considered in determining the price of the Common Shares were the
history of, and prospects for, the industry in which the Company operates,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. It should be noted that the stock market in recent years
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. Frequently, such
fluctuations have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations, as well as general economic
and market conditions, may have a material adverse effect on the market price of
the Common Shares. See "Description of Securities", "Underwriting" and
"Financial Statements".
19. Lack of Prior Market for Common Shares; No Assurance of Public
Trading Market. Prior to this Offering, no public trading market existed for the
Common Shares. There can be no assurances that a public trading market for the
Common Shares will develop or that a public trading market, if developed, will
be sustained. Although the Company anticipates that, upon completion of this
Offering, the Common Shares will be eligible for inclusion on The Nasdaq
SmallCap Market, no assurance can be given that the Common Shares will be listed
thereon. Under prevailing rules of The Nasdaq Stock Market, Inc., in order to
qualify for initial quotation of securities on The
13
Nasdaq SmallCap Market, a company, among other things, must have at least
$4,000,000 in total assets, $2,000,000 in total capital and surplus, $1,000,000
in market value of public float and a minimum bid price of $3.00 per share.
Although the Company may, upon the completion of this Offering, qualify for
initial quotation of the Common Shares on The Nasdaq SmallCap Market, in order
for the Common Shares to continue to be listed thereon, the Company, among other
things, generally must have $2,000,000 in total assets, $1,000,000 in total
capital and surplus, $1,000,000 in market value of public float and a minimum
bid price of $1.00 per share.
In order to be included on The Nasdaq SmallCap System, and to maintain
such listing, the Company would need a minimum of two market makers for its
Common Shares.
The Nasdaq Stock Market, Inc. has proposed a rule change which, if
adopted, would impose substantially more stringent criteria for the initial
and continued listing of securities on The Nasdaq SmallCap Market. The
proposed new rules provide that, for initial listing on The Nasdaq SmallCap
Market, a company would need to have, among other things, (i) either net
tangible assets (i.e., net of goodwill) of $4,000,000, a market capitalization
of $50,000,000 or net income for two of the last three fiscal years of $750,000,
(ii) a minimum market value of public float of $5,000,000, (iii) a minimum bid
price of $4.00 per share, and (iv) either one year of operating history or
a market capitalization of $50,000,000. For continued listing on The Nasdaq
SmallCap Market, a company would need to have, among other things,
(i) either net tangible assets of $2,000,000, a market capitalization of
$35,000,000, or net income for two of the last three fiscal years of $500,000
and (ii) a minimum market value of public float of $1,000,000. Additionally,
for both initial listing and continued listing on The Nasdaq SmallCap Market,
companies would be required to have at least two independent directors, and an
Audit Committee, a majority of the members of which would need to be independent
directors.
Furthermore, under the proposed rules, the Company would be required
to have at least three market makers for its Common Shares for inclusion on The
Nasdaq SmallCap Market and two market makers to maintain such listing.
If the Company is unable to satisfy the requirements for quotation on
The Nasdaq SmallCap Market under the current rules, or the proposed rules,
if adopted, trading, if any, in the Common Shares offered hereby would be
conducted in the over-the-counter market in what is commonly referred to as the
"pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the securities offered hereby. The above-
described rules may adversely affect the liquidity of the market for the
Company's securities. If a trading market does in fact develop for the Common
Shares offered hereby, there can be no assurance that it will be maintained. In
any event, because certain restrictions may be placed upon the sale of
securities at prices under $5.00 per share, if the price of the Common Shares
falls below such threshold, unless such Common Shares qualify for an exemption
from the "penny stock" rules, such as a listing on The Nasdaq SmallCap Market,
some brokerage firms will not effect transactions in the Company's securities
and it is unlikely that any bank or financial institution will accept such
securities as collateral. Such factors could have a material adverse effect on
the market for the Common Shares. See "Risk Factors - 'Penny Stock' Regulations
May Impose Certain Restrictions on Marketability of Securities" and
"Underwriting".
Although it has no legal obligation to do so, the Underwriter may
from time to time act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Underwriter will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's Common Shares
14
may be significantly affected by the degree, if any, of the Underwriter's
participation in the market. The Underwriter may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's Common Shares may be materially adversely affected by the fact that a
significant portion of the Common Shares may be sold to customers of the
Underwriter.
The Underwriter has agreed, but is not obligated, to act as a market
maker for the Company's Common Shares. Although the Company anticipated it will
have additional market makers, it has not identified any as of the date of this
Prospectus. If the Company cannot engage additional market makers, it may not
satisfy the requirements for inclusion, or continued listing, on The Nasdaq
SmallCap Market.
20. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. If, as anticipated,
the Common Shares offered hereby are authorized for quotation on The Nasdaq
SmallCap Market upon the completion of this Offering, such securities will
initially be exempt from the definition of "penny stock." If the Common Shares
offered hereby are removed from listing on The Nasdaq SmallCap Market at any
time, the Company's Common Shares may become subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the
Company's Common Shares and may affect the ability of purchasers in this
Offering to sell the Company's Common Shares in the secondary market as well as
the price at which such purchasers can sell any such Common Shares.
21. Immediate and Substantial Dilution; Equity Securities Sold
Previously at Below Offering Price. Upon completion of this Offering, assuming
no exercise of the Overallotment Option, and without giving effect to the
exercise of the Underwriter's Warrant, but giving retroactive effect to the
issuance of the 100,000 Common Shares to the bridge lender (the "Bridge Lender")
in the Bridge Financing in the gross amount of $100,000 (see "Bridge
Financing"), the pro forma net tangible book value per share of the Company's
Common Shares as of September 30, 1996 would have been $1.45. At the initial
public offering price of $5.00 per share, investors in this Offering will
experience an immediate dilution of approximately $3.55 or 71% in pro forma net
tangible book value per share, and existing investors will experience an
increase of approximately $3.05 per share. The present stockholders of the
Company have acquired their respective equity interest at costs substantially
below the public offering price. Accordingly, to the extent that the Company
incurs losses, the public investors will bear a disproportionate risk of such
losses. The exercise of certain options and warrants granted to Stephen F.
Brandon, Thomas F. Reed, Jean R. Sperry, Allan R. Avery and J. Leslie Glick, the
executive officers and directors of the Company, and an affiliate of Mr. Avery
to purchase up to an aggregate of 547,500 Common Shares
15
will result in further dilution to the public investors. Messrs. Brandon,
Reed, Sperry and Avery, and Dr. Glick are subject to an agreement with the
Underwriter restricting the transferability of their Common Shares for a period
of two years from the date of this Prospectus without the consent of the
Underwriter. See "Dilution", "Management - Executive Compensation", "Certain
Relationships and Related Transactions" and "Underwriting".
22. No Dividends. The Company has never paid any dividends on its
Common Shares and does not intend to pay dividends on its Common Shares in the
foreseeable future. Any earnings which the Company may realize in the
foreseeable future are anticipated to be retained to finance the growth of the
Company. See "Dividend Policy".
23. Shares Eligible for Future Sale May Adversely Affect the Market.
All of the Company's outstanding Common Shares are "restricted securities" and,
in the future, may be sold in compliance with Rule 144 or pursuant to
registration under the Act (see discussion below with respect to the Bridge
Lenders). Rule 144 currently provides, in essence, that a person holding
"restricted securities" for a period of two years may sell an amount every three
months up to the greater of (a) one percent of the Company's issued and
outstanding securities of that class of securities or (b) the average weekly
volume of sales of such securities during the four calendar weeks preceding the
sale if there is adequate current public information available concerning the
Company. Additionally, non-affiliates (who have not been affiliates of the
Company for at least three months) may sell their "restricted securities" in
compliance with Rule 144 without volume limitations after they have held such
securities for a period of three years. An aggregate of 950,000 Common Shares
have been owned by the holders thereof (all affiliates of the Company) for more
than three years. However, an aggregate of 879,500 of such Common Shares are
subject to an agreement with the Underwriter restricting their transferability
for a period of two years without the Underwriter's consent. Additionally, the
holders of an aggregate of 122,000 Common Shares have entered into an agreement
with the Underwriter restricting the transferability of such Common Shares for a
period of six months.
The Company is registering for resale the 100,000 Common Shares
issued to the Bridge Lender. Such shares may be resold at any time following the
date of this Prospectus, subject to an agreement between the Bridge Lender and
the Underwriter restricting the transferability of such Common Shares for a
period of two years without the Underwriter's consent. Prospective investors
should be aware that the possibility of resales by the Selling Stockholder and
other stockholders of the Company may have a material depressive effect on the
market price of the Company's Common Shares in any market which may develop,
and, therefore, the ability of any investor to sell his Common Shares may be
dependent directly upon the number of Common Shares that are offered and sold.
See "Bridge Financing" and "Principal and Selling Stockholders".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 Common
Shares offered hereby, are estimated to be $5,240,000 (after deducting
underwriting discounts of $650,000 and
16
other expenses of this Offering estimated to be $610,000, including the
Underwriter's non-accountable expense allowance in the amount of 3% of the gross
proceeds of the Offering, and a $100,000 financial consulting fee payable to the
Underwriter at the closing) (but not considering any exercise of the
Overallotment Option or the Underwriter's Warrant). The Company, based upon all
currently available information, intends to utilize such net proceeds
approximately as follows:
Approximate Approximate
Amount of Percentage
Net Proceeds of Net Proceeds
Marketing and advertising (1) $ 1,840,000 35.1%
Hiring of additional personnel (2) 550,000 10.5%
Product acquisition (3) 500,000 9.5%
Repayment of indebtedness (4) 400,000 7.7%
Research and development (5) 300,000 5.7%
Working capital (6) 1,650,000 31.5%
Total $ 5,240,000 100.0%
============ ==========
(1) The Company intends to utilize funds to create sales force literature, sales
brochures and advertisements, hold educational symposia for physicians,
undertake medical, pharmacy and trade journal advertising and direct mail
campaigns, and supply product samples to physicians and pharmacies.
(2) Upon the closing of this Offering, the Company intends to hire additional
employees, including a national field sales manager, a controller and six to
twelve field sales representatives.
(3) Part of the Company's strategy to develop its business includes the
acquisition of unique products that meet important patient needs in the
underserved, neglected areas of medicine and healthcare (a strategy that the
Company pursued in the acquisition of Mag-Tab(R)SR and Unifiber(R)). It is
anticipated that, if less than the full amount or none of the proceeds allocated
for product acquisition is utilized for such purpose, the unused amount will be
reallocated to working capital.
17
At present, the Company has not identified any acquisition candidates, but it is
actively seeking such opportunities. See "Business - General".
(4) TO be used for the repayment of (i) a promissory note in the aggregate
principal amount of $100,000, issued in connection with the Company's Bridge
Financing transaction; and (ii) a certain loan made to the Company by Mr.
Brandon in January 1991, currently in the principal amount of $295,487, which is
due in January 1998, and which may be prepaid without penalty. Interest accrues
on the Bridge Financing promissory note at the rate of 10% per annum. Interest
accrues on Mr. Brandon's loan at the rate of 10% per annum and is paid monthly.
See "Bridge Financing" and "Certain Relationships and Related Transactions".
(5) The Company intends to fund clinical studies of its products and research on
new formulations of Mag-Tab(R)SR, including a liquid, a unit dosage package, and
a combination magnesium supplement product containing other nutrients. See
"Business - Products - Mag- Tab(R)SR".
(6) To be used for general operating and overhead expenses, the manufacture of
product, and the payment of a $200,000 installment payment, due in March 1997,
in connection with the acquisition of the rights to Unifiber(R). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Business - General".
The amounts set forth above are estimates. Should a reapportionment
or redirection of funds be determined to be in the best interests of the
Company, the actual amount expended to finance any category of expenses may be
increased or decreased by the Company, at its discretion.
The Company believes that the proceeds of this Offering will enable
it to increase its annual revenues through the expansion of its business and
development of product lines. As a result, the Company believes that the net
proceeds of this Offering, together with anticipated increased revenues from
operations, will be sufficient to conduct the Company's operations for at least
18 months.
It is anticipated that, to the extent that the Company's expenditures
are less than projected and/or the proceeds of this Offering increase as a
result of the exercise by the Underwriter of its Overallotment Option, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions. The Underwriting Agreement generally restricts the Company from
issuing additional equity or debt securities, in either public or private
offerings, or from obtaining debt financing, for a period of three years
following the date of this Prospectus without the prior written approval of the
Underwriter, which approval may not be unreasonably withheld. Even if the
Underwriter consents to the Company obtaining debt financing, there can be no
assurance that such additional financing, if available, will be on terms
commercially reasonable or acceptable to the Company. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need for Additional Financing" and
"Risk Factors - Risks Attendant to Expansion".
Pending use of the proceeds, the funds will be invested in
certificates of deposit, high grade commercial paper and government securities,
or other low risk investments.
18
DILUTION
All references herein to pro forma net tangible book value, pro forma
net tangible book value per Common Share, and the number of Common Shares
outstanding on a pro forma basis give retroactive effect to the December 1996
issuance of 100,000 Common Shares in the Bridge Financing and assume no exercise
of the Underwriter's Overallotment Option or the Underwriter's Warrant. See
"Bridge Financing" and "Underwriting." As of September 30, 1996, the Company had
an aggregate of 1,101,500 Common Shares outstanding on a pro forma basis and a
pro forma net tangible book value deficit of ($1,764,641), or ($1.60) per Common
Share. Pro forma net tangible book value (deficit) per share represents the
total amount of the Company's pro forma tangible assets, less the total amount
of its pro forma liabilities, divided by the total number of Common Shares
outstanding on a pro forma basis.
After giving effect to the sale of 1,300,000 Common Shares by the
Company at the Offering price of $5.00 per Common Share, with net proceeds of
$5,240,000, the pro forma net tangible book value of the Company as of September
30, 1996 would be $3,475,359, or $1.45 per Common Share. This amount represents
an immediate dilution (the difference between the price per Common Share to
purchasers in this Offering and the pro forma net tangible book value per Common
Share as of September 30, 1996, after giving effect to the issuance of the
1,300,000 Common Shares) of approximately $3.55 per Common Share to new
investors and an immediate increase (the difference between the pro forma net
tangible book value per Common Share as of September 30, 1996, after giving
effect to the issuance of the 1,300,000 Common Shares, and the net tangible book
value (deficit) per Common Share as of September 30, 1996, before giving effect
to the Offering) of approximately $3.05 per Common Share to the Company's
current stockholders. Such increase to the Company's current stockholders is
solely attributable to the cash price paid by purchasers of the Common Shares
offered for sale by the Company.
The following table illustrates the per share dilution as of September 30, 1996:
Public offering price per share(1)....................... $5.00
Pro forma net tangible book value (deficit) per share
before giving effect to the Offering................... $(1.60)
----
Increase per share attributable to the sale of the
Common Shares offered hereby.......................... 3.05
----
Pro forma net tangible book value per share after the
Offering(2)........................................... 1.45
----
Dilution per share to purchasers in the Offering (3) .... $3.55
====
(1) Before deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
19
(2) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(3) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrant. See "Underwriting".
The following table sets forth the relative cost and ownership
percentage of the Common Shares offered hereby as compared to the Common Shares
outstanding immediately prior to the Offering.
Common Shares Average
Acquired Total Consideration Price
---------------------- --------------------- ---------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Current Stockholders........ 1,101,500 46.0% $ 101,012 1.5% $ .09
Purchasers of Common
Shares in the Offering.. 1,300,000(1) 54.0% $6,500,000 98.5% $5.00
--------- ------ --------- ----
Total................... 2,401,500(1) 100.0% $6,601,012 100.0%
========= ====== ========== =======
(1) Assumes no exercise of the Underwriter's Overallotment Option. See
"Underwriting".
20
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of September 30, 1996 and as adjusted to give effect to the issuance
and sale of the 1,300,000 Common Shares offered by the Company at $5.00 per
Common Share, and the application of net proceeds of approximately $5,240,000
therefrom. This table should be read in conjunction with the financial
statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus.
September 30, 1996
-------------------------------------------
Pro forma
Actual Pro Forma (1) As Adjusted(2)
------ ------------- --------------
Short-Term Debt.................................... $ 542,952 $ 642,952 $ 542,952
========== ========== ==========
Long-Term Debt..................................... $1,410,444 $ 1,410,444 $1,110,444
Stockholders' Equity (Deficit):
Common Shares, $.00105 par value, 15,000,000
shares authorized, 1,001,500 shares issued and
outstanding (actual), 1,101,500 shares issued
and outstanding (pro forma)(1), and 2,401,500
shares issued and outstanding, (pro forma,
as adjusted)..................................... 1,052 1,157 2,522
Additional Paid-in Capital....................... 99,960 499,855 5,738,490
Accumulated Deficit (3).......................... (758,549) (1,158,549) (1,158,549)
Total Stockholders' Equity (Deficit)............... (657,537) (657,537) 4,582,463
Total Capitalization............................... 752,907 752,907 5,692,907
(1) Gives retroactive effect to the Bridge Financing. (See "Bridge Financing")
(2) Reflects the issuance of the 1,300,000 Common Shares of the Company offered
hereby, and the anticipated application of the net proceeds of $5,240,000
therefrom, after deducting underwriting discounts and commissions and
estimated expenses of the Offering.
(3) Accumulated Deficit (pro forma) and Accumulated Deficit (pro forma,
as adjusted) include a deferred financing charge of $400,000
resulting from the Company's Bridge Financing transaction. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview".
DIVIDEND POLICY
Holders of the Company's Common Shares are entitled to dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. The Company has not declared or paid any dividends in the
past and does not currently anticipate declaring or paying any dividends in the
foreseeable future. The Company intends to retain earnings, if any, to finance
the development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends will ever be paid.
BRIDGE FINANCING
In December 1996, the Company borrowed $100,000 from an unaffiliated
lender (the "Bridge Lender") in a financing in which the Underwriter acted as
the placement agent. In consideration for making the loan to the Company, the
Bridge Lender received (i) a $100,000 promissory note (the "Bridge Note") and
(ii) 100,000 Common Shares.
The Bridge Note bears interest at the rate of 10% per annum and is
due and payable upon the earlier of(i) December 9, 1997 or (ii) the closing date
of the initial underwritten public offering of the Company's securities
described in this Prospectus. The Company intends to use a portion of the
proceeds of this Offering to repay the Bridge Lender. See "Use of Proceeds."
The Company entered into the Bridge Financing transaction because it
required additional financing to fund costs and expenses relating to this
Offering, and no other sources of financing were
21
available to the Company at that time. As part of the Bridge Financing
transaction, the Company agreed to register the Common Shares issued to the
Bridge Lender by the Company for resale under the Act. Therefore, the
Registration Statement, of which this Prospectus forms a part, includes the
100,000 Common Shares held by the Bridge Lender. See "Principal and Selling
Stockholders" and "Underwriting".
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was formed in 1991 as a Texas corporation and
reincorporated in Delaware in October 1996. Since inception, the Company has
focused its business strategy on marketing, distributing, and acquiring
non-prescription pharmaceutical and nutraceutical products. During 1991, the
Company acquired its first product, Mag-Tab(R)SR, a patented sustained-release
magnesium supplement. Mag-Tab(R)SR was the Company's only product until November
1995, at which time the Company acquired and began selling its second product,
Unifiber(R), a dietary fiber supplement. See "Business".
The Company's revenues are generated from sales of its products to
wholesale drug and dietary supplement distributors, which, in turn, supply
retail pharmacies, direct retail pharmacy accounts, and international
distributors who purchase the Company's products for resale to patient or
consumer end users. Since 1991, annual revenues of the Company have grown from
approximately $130,000 to more than $606,000 for the year ended December 31,
1995. For 1995, approximately $516,000 of revenues was attributed to sales of
MagTab(R)SR, while the remainder was attributed to sales of Unifiber(R). For the
nine months ended September 30, 1996, the Company had revenues of $906,744,
approximately $465,000 of which was attributed to MagTab(R)SR and approximately
$434,000 of which was attributed to Unifiber(R).
The Company believes that it may be able to achieve greater sales
results with sufficient working capital to pursue its marketing strategies and
acquire other products. Historically, working capital had been made available by
stockholder and director loans, and bank loans, including, (i) a loan from
Stephen F. Brandon, Chief Executive Officer, President and Chairman of the Board
of the Company, originally in the principal amount of $500,000, of which
$295,487 remains outstanding, (ii) loans from certain stockholders and directors
in the aggregate principal amount of $112,500, (iii) a $250,000 credit facility
from one of the Company's banks, of which approximately $144,000 and $113,000
was due and outstanding at December 31, 1995 and September 30, 1996,
respectively, guaranteed by the U.S. Small Business Administration, the
repayment of which is secured by a pledge of all of the Common Shares held by
Mr. Brandon and (iv) a $300,000 unsecured loan by another bank. See "Use of
Proceeds" and "Certain Relationships and Related Transactions".
22
In December 1996, the Company borrowed $100,000 from the Bridge
Lender in the Bridge Financing transaction. In consideration for making
the loan to the Company, the Bridge Lender received (i) a $100,000 Bridge Note
and (ii) 100,000 Common Shares. The Company has granted the Bridge Lender
certain "piggyback" registration rights with respect to such Common Shares. The
Bridge Note bears interest at the rate of 10% per annum. The Bridge Note is due
and payable upon the earlier of (i) December 9, 1997 or (ii) the closing of any
initial public offering of the Company's securities. See "Use of Proceeds" and
"Bridge Financing".
The fair value of the Bridge Lender's Common Shares at the date of
issuance, of approximately $400,000, is a non-cash charge which will be recorded
as a deferred financing cost and amortized over the earlier of (i) the one year
term of the Bridge Note or (ii) the period commencing upon the closing of the
Bridge Financing and ending upon the closing of this Offering, if the Offering
closes prior to the payment of the Note.
In January 1997, the Company entered into a credit facility loan
agreement (the "Credit Agreement") with an affiliate of Allan R. Avery, a
director of the Company, to borrow up to $150,000. As of the date of this
Prospectus, the Company has borrowed $75,000. The outstanding amounts under the
Credit Agreement are due and payable on or before January 20, 1998. Interest
accrues on the unpaid amounts borrowed at the rate of 10% per annum. In
consideration for entering into the Credit Agreement, the Company issued to the
affiliate of Mr. Avery warrants to purchase an aggregate of 30,000 Common
Shares, at an exercise price of $6.00 per share, for a period of five years
commencing on the first anniversary date of this Prospectus. See "Certain
Relationships and Related Transactions".
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues for the nine months ended September 30, 1996 were $906,744
compared to $389,700 for the nine months ended September 30, 1995, a 133%
increase. The increase in sales was attributable to (i) revenues generated by
the sale of Unifiber(R) product, the rights to which the Company acquired in
November 1995, and, therefore, such product did not generate revenues during the
first nine months of 1995, and (ii) increased demand for Mag-Tab(R)SR in certain
of the Company's geographic markets.
Gross profit for the nine months ended September 30, 1996 was
$564,382 compared to $303,587 for the nine months ended September 30, 1995, an
86% increase. Gross profit as a percentage of revenues for the nine months ended
September 30, 1996 decreased to approximately 62% as compared to approximately
78% for the nine months ended September 30, 1995. The decrease in profit margin
was due principally to the higher manufacturing cost of Unifiber(R) compared to
that of MagTab(R)SR. The Company believes, but cannot assure, that gross margins
and the cost of sales for Unifiber(R) can be improved by contracting with an
alternate third party contract manufacturer, whereby packaging and freight costs
can be reduced. The Company anticipates engaging another third party contract
manufacturer by the second quarter of 1997.
Accounts receivable for the nine months ended September 30, 1996 were
$217,188 compared to $84,566 for the nine months ended September 30, 1995, a
157% increase. This increase was due to (i) new revenues being generated by
Unifiber(R) that were not present in 1995, and (ii) increased purchase of
product by the Company's wholesale distributors in response to 5% promotional
allowance offered to them by the Company. Management anticipates that from time
to time it will continue the practice of offering its wholesalers and retail
pharmacy customers special promotional discounts, and as such, both revenues and
accounts receivables may vary significantly from month to month or quarter to
quarter. All of the accounts receivable outstanding at September 30, 1996 were
subsequently collected.
Selling, general and administrative expenses were $563,612 for the
nine months ended September 30, 1996 compared to $211,682 for the nine months
ended September 31, 1995, a 166% increase. Of this increase, approximately
$90,000 resulted from increased marketing activities. Additionally, the Company
added an Executive Vice President, a national key account sales manager, a
contracts and bids manager, and a telemarketing manager, which accounted for
approximately $120,000 of new salary expense and approximately $63,000 resulted
from an
23
increase in depreciation and amortization. The balance of the increase in
selling, general, and administrative expense was attributed to increased
operating and administrative expenses.
Interest expense for the nine months ended September 30, 1996 was
$144,042 compared to $55,056 for the nine months ended September 30, 1995, a
162% increase. Of this increase, $84,804 was imputed interest relating to the
Unifiber(R) acquisition.
Overall, the Company had net operating income of $770 for the nine
months ended September 30, 1996 compared to net operating income of $91,905 for
the nine months ended September 30, 1995, a 99% decrease. The Company
experienced a net loss of $140,588 for the nine months ended September 30, 1996
compared to a net income of $37,767 for the nine months ended September 30,
1995. The primary reason for this difference was the significant increase in
amortization expense relating to Unifiber(R) and the imputed interest attributed
to the Unifiber(R) acquisition.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 were $606,268 compared
to $415,330 for the year ended December 31, 1994, a 46% increase. The increase
in revenues resulted from an increased demand for Mag-Tab(R)SR and the November
and December 1995 revenues for Unifiber(R).
Gross profit for the year ended December 31, 1995 was $423,122
compared to $279,858 for the year ended December 31, 1994, a 51% increase. The
increase was primarily due to the additional revenues from the sale of
Unifiber(R) product. Gross profit as a percentage of revenues for the year ended
December 31, 1995 compared to the year ended December 31, 1994 increased to
approximately 70% from approximately 67%. This net increase was due to inclusion
of the settlement of a lawsuit, offset by smaller gross margins on Unifiber(R)
compared to Mag-Tab(R)SR. Additionally, cost of sales increased marginally due
to the increased freight costs associated with the shipping and receiving of
Unifiber(R).
Selling, general and administrative expenses for the year ended
December 31, 1995 was $334,941 compared to $275,350 in the year ended December
31, 1994, a 22% increase. This increase reflects increased salaries and
marketing costs incurred by the Company. The increased expenses include the
salary of a new contracts and bids administrator as well as acquisition costs
related to new management information software programs needed to support
Unifiber(R) and Mag- Tab(R)SR contract sales and chargebacks. The capability to
handle contract sales and rebates electronically positions the Company to
compete favorably with other companies that serve the large number of existing
GPOs and the expanding managed healthcare marketplace.
Interest expense for the year ended December 31, 1995 was $91,800
compared to $67,274 for the year ended December 31, 1994, a 36% increase. The
increase was due principally to imputed interest related to the Unifiber(R)
acquisition.
24
The Company's net loss for the year ended December 31, 1995 was
$1,003, compared to a net loss for the year ended December 31, 1994 of $62,340.
The reduction in loss came primarily from the addition of Unifiber(R) revenues
and from other income which was derived from the settlement of a litigation.
Liquidity and Capital Resources
At September 30, 1996, the Company had a working capital deficit of
$368,948, as compared to a working capital deficit of $67,504 at December 31,
1995. The increase in the working capital deficit primarily resulted from the
reclassification of a $200,000 installment payment due in March 1997 in
connection with the acquisition of the rights to Unifiber(R), from a long-term
liability to a current liability and losses incurred in the nine month period
ended September 30, 1996. The Company intends to pay the March 1997
$200,000 Unifiber(R) installment payment out of the working capital portion of
the net proceeds of this Offering. The aggregate purchase price for the
acquisition of the rights to Unifiber(R) is the greater of $1,600,000 of 20% of
annual product sales, but in no event greater than $3,000,000. Of such purchase
price, $200,000 was paid at the time of acquisition, $200,000 will be paid in
March 1997 (as discussed above) and the remainder will be payable in increasing
annual installments from 1998 to 2001 of between $250,000 and $400,000. The
Company anticipates that it will pay the remaining annual Unifiber(R)
installment payments, from revenues, the Company's available credit facility
from a bank, and possibly funds from additional debt or equity financings, if
required and if available and consented to by the Underwriter. However, given
the length of the remaining payment period, the Company cannot assure that the
above sources will be sufficient or available to meet the installment payments
or that circumstances which are currently unforeseeable will not adversely
impact the Company's ability to make such installment payments. In order for
the Company to be obligated to pay the maximum amount of $3,000,000, net sales
of Unifiber(R) would have to total $15,000,000 over the next four years. In
such case, the Company would have estimated gross earnings from Unifiber(R) of
$9,000,000. Accordingly, the Company does not believe that payment of the
maximum amount under the Unifiber(R) acquisition agreement would have a negative
effect on the Company's financial position. See "Use of Proceeds" and
"Underwriting".
Due to increased sales during the nine month period ended September
30, 1996, the Company's accounts receivable as of September 30, 1996 was
$217,188, compared to $84,656 as of December 31, 1995, a 157% increase.
During the nine months ended September 30, 1996, a nominal amount of
net cash was provided by operating activities. Such result was due to a decrease
in inventory of $48,673, an increase in accounts payable and accrued expenses of
$47,198 and imputed interest relating to the acquisition of Unifiber(R) of
$84,804, and depreciation and amortization expenses of $88,044, offset by the
Company's $140,588 loss for such period and an increase in accounts receivable
of $132,532. There were no significant differences in cash generated by
operating activities in the nine month periods ended September 30, 1996 and
1995.
No significant investing activities occurred in the nine month
periods ended September 30, 1996 and September 30, 1995.
There was an increase in cash used for financing activities in the
nine month period ended September 30, 1996 of $133,227 as compared to the nine
month period ended September 30, 1995. This was primarily due to the payment of
notes payable - stockholders of $57,378, and payment of deferred offering costs
of $47,364 in the nine month period ended September 30, 1996 as compared to
cash received from the issuance of common stock of $45,000 less the repayment of
stockholders' loan of $14,300 in the nine month period ended September 30,
1995. The cash used for financing
25
activities of $134,965 for the nine month period ended September 30, 1996 was
the primary reason for the decrease in cash of $135,535 for that period. For the
nine month period ended September 30, 1995, cash increased by a nominal amount.
In December 1996, the Company received $100,000 in the Bridge
Financing transaction. Such proceeds are being used to fund the costs and
expenses of this Offering. See "Bridge Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview".
At present, the Company's sales and marketing efforts are focused on
expanding the promotion of its existing products to physicians and other
healthcare professionals. The Company believes that the Company's existing
United States markets for its products have the potential for substantial
expansion. Additionally, the Company intends to utilize a portion of the
proceeds from this Offering to expand the Company's product lines, which the
Company believes will result in increased product sales and the ability to
compete more aggressively in the niche market segments of the pharmaceutical and
neutraceutical industries. The Company, however, cannot assure that it will
identify any products which meet the Company's acquisition criteria in the near
future, or at all. Additionally, even if such a product is identified, there can
be no assurance that the Company will be able to acquire such product. See "Use
of Proceeds".
The Company believes that it has a diverse and growing market for its
products. While the Company is dependent on third party contract manufacturers
to supply its products, it believes it has developed relationships with
alternative manufacturers that could supply finished product should the Company
have this need. At the present, the Company's sales are geographically dispersed
across the United States.
The Company believes that the net proceeds from the Offering,
together with anticipated revenues from operations, should be sufficient to fund
operations for at least 18 months. Management intends to utilize approximately
35% (or $1,840,000) and approximately 10% (or $500,000) of the net proceeds of
the Offering to expand its business through the marketing and advertising of its
products, and for the acquisition of new products, respectively. In addition,
part of the net proceeds will be used to repay approximately $300,000 of related
party debt, and the $100,000 Bridge Financing. Furthermore, the Company will use
part of the net proceeds to pay the March 1997 $200,000 installment payment in
connection with the acquisition of the rights to Unifiber(R). On a long-term
basis, the Company believes that the growth of sales of its product lines will
ultimately result in revenues sufficient to fund the Company's operations. To
the extent that cash flow is not sufficient to fund operations, it would be
necessary for the Company to seek external debt or equity financing or scale
back operations. Management cannot ensure that financing would be obtainable on
terms favorable to the Company, or at all. See "Risk Factors - Dependence on
Offering Proceeds; Possible Need for Additional Financing" and "Use of
Proceeds".
The Company's independent certified accountants issued a modified
going concern opinion with regard to the December 31, 1995 financial statements
based upon an accumulated deficit of
26
$617,961 and a working capital deficit of $67,504 at December 31, 1995. Such
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business (including, without limitation, the
Company's lease for its premises which requires minimum rental payments
aggregating $67,099 in 1997 and 1998, and payments under employment agreements
which the Company intends to enter into, which will require minimum payments
aggregating $221,000 over a three year period, commencing on the closing date
of the Offering). The continuation of the Company as a going concern is
dependant upon its ability to generate sufficient cash from operations
and financing activities. The Company's working capital deficit raises
substantial doubt about the entity's ability to continue as a going concern.
The Company's viable plans to address the foregoing included and include the
following:
1. The generation of an additional $100,000 in gross proceeds through
the Bridge Financing transaction in December 1996. See "Bridge Financing".
2. The establishment of a Credit Agreement with an affiliate of Mr.
Avery providing the Company with a credit favility of up to $150,000, of which
$75,000 has been borrowed as of the date of the Prospectus. See "Certain
Relationships and Related Transactions".
3. The closing of this Offering with anticipated net proceeds of
approximately $5,240,000, a portion of which will be used to satisfy certain
outstanding obligations of the Company. See "Use of Proceeds".
4. An increase in revenues by substantially increasing its marketing
activities, both in and outside the United States. See "Business-Sales and
Marketing".
The Company believes that the increase in capital obtained in the
Bridge Financing transaction, under the Credit Agreement, and in this
Offering will enhance the Company's potential for a transition to profitable
operations in the future.
The Company believes that these plans can be effectively implemented
in the next twelve months. There can be no assurances, however, that the Company
will be successful in these endeavors. The Company's ability to continue as a
going concern is dependent on the implementation and success of these plans. The
financial statements do not include any adjustments in the event the Company is
unable to continue as a going concern.
Impact of Inflation
Inflation has not been a major factor in the Company's business.
However, there can be no assurance that this will continue.
27
BUSINESS
General
The Company manufactures through third party contractors, and markets
and distributes, non-prescription pharmaceutical and nutraceutical dietary
supplement products. The Company seeks to exploit product niches that have
generally been overlooked or neglected by the major drug and dietary supplement
companies because of the relatively small perceived size of the market for such
products. The Company's current products are a patented, state-of-the-art,
sustained release magnesium supplement marketed under the name Mag-Tab(R)SR, and
a dietary fiber supplement marketed as Unifiber(R).
In 1991, the Company acquired all rights to Mag-Tab(R)SR, which is
manufactured for the Company by Schering Plough Corporation ("Schering"). See
"Risk Factors - No Manufacturing Capability or Experience; Dependence on Others"
and "Business - Manufacturing".
In November 1995, the Company acquired all rights to Unifiber(R) from
Dow Hickam Pharmaceuticals Inc. ("Dow Hickam"), a subsidiary of Mylan
Pharmaceuticals Inc. Pursuant to the acquisition agreement (the "Dow Hickam
Agreement"), Dow Hickam manufactured Unifiber(R) for the Company through
December 31, 1996. Although Dow Hickam no longer manufacturers Unifiber(R) for
the Company, the Company currently has a 15 month inventory supply of the
product, based on current sales levels. By the second quarter of 1997, the
Company anticipates that it will engage another third party contractor to
manufacture Unifiber(R). The Company is currently investigating such
manufacturing options and believes, but cannot assure, there will be no
difficulty engaging another contract manufacturer. See "Risk Factors - No
Manufacturing Capability or Experience; Dependence on Others" and "Business
Manufacturing".
The Company markets Mag-Tab(R)SR and Unifiber(R) nationally to
virtually all of the drug wholesalers in the United States, which, in turn,
supply retail pharmacies, state and federal institutions, and group and
managed care purchasing organizations ("GPOs") acting on behalf of hospitals,
extended care facilities and nursing homes. See "Business - Sales and
Marketing".
In addition to manufacturing and selling Mag-Tab(R)SR and
Unifiber(R), the Company intends to explore opportunities to add, through
acquisition or licensing, other unique products that meet important needs in the
underserved, neglected areas of medicine and healthcare, or that do not fit the
strategic plans of the major drug and dietary supplement companies. At present,
the Company has not identified any acquisition candidates but it is actively
seeking such opportunities. See "Risk Factors - Risks Attendant to Expansion"
and "Use of Proceeds".
A glossary of certain terms used in this section is included in the
Prospectus beginning on page 57.
28
Industry
- --------
Magnesium
Numerous scientific articles, published in medical journals by
leading academic physicians, have clearly shown that magnesium is an important
metabolic electrolyte, and that magnesium depletion accompanies many medical
disorders. Mag-Tab(R)SR and other magnesium formulations are administered in
pharmacologic or physiologic doses because magnesium replacement is critical to
preventing complications from magnesium deficiency associated with certain
serious medical conditions.
Magnesium, the second most abundant intracellular cation, is also one
of the most crucial, being an essential cofactor in more than 300 enzymatic
reactions in the human body. Neuromuscular transmission and protein metabolism
also depend on proper magnesium balance. Data show, for example, that up to 10%
percent of all hospitalized persons and 50% of those in critical care units are
magnesium deficient. The scope of the problem is underscored by a study,
reported in the Journal of the American Medical Association (Vol. 263, p. 3063,
1990). The investigators measured magnesium levels from more than 1,000 blood
serum specimens that had been provided for electrolyte determinations. Almost
half of these specimens demonstrated hypomagnesemia (low- serum magnesium), and
yet magnesium measurements were specifically requested on only 10% of the
specimens. In the Company's opinion, those findings probably underestimated the
true incidence of magnesium deficiency as serum magnesium levels do not
correlate well with magnesium tissue stores. The body stores about 24 grams of
magnesium, but less than 1% of that is in the serum. Consequently, while a low
serum magnesium level always indicates a severe deficiency, a normal level does
not rule out inadequate body stores. Conversely, high magnesium serum levels are
rare and occur only in the presence of severe kidney disease. Many factors
contribute to hypomagnesemia or low magnesium body stores. Anything that impairs
magnesium absorption through the small bowel or promotes excessive loss through
the kidney, including diarrhea, malabsorption syndrome, diabetes, renal
disorders, drugs (such as amino glycosides), chemotherapy agents, diuretics used
for hypertension, and alcohol, can lead to magnesium deficiency.
In 1992, the National Council on Magnesium and Cardiovascular Disease
stated that an increased oral intake of magnesium should be seriously considered
to counter magnesium depletion associated with the following diseases and
conditions:
Cardiovascular
- Congestive heart failure, ventricular arrhythmias,
essential hypertension, and diuretic therapy with or
without associated hypokalemia (low potassium).
Co-Morbid Conditions
- Diabetes;
- Alcohol intake;
29
- Weight loss, especially liquid preparations;
- Diarrhea, transient or associated with chronic inflammatory
bowel disease.
Other published data have indicated that oral magnesium
supplementation may be effective to counter magnesium depletion associated with
PMS symptoms, migraine headaches, chronic fatigue syndrome, dementias (such as
Alzheimer's disease) and osteoporosis.
The Company's market research shows that approximately 46,000
physicians are responsible for 90% or more of ethical uses for oral magnesium
products and that those physicians are primarily family practitioners,
cardiologists, internists, neurologists, obstetricians/gynecologists and
endocrinologists. The Company believes that most primary care physicians, such
as family practice physicians, are unaware of the causes, frequency, and serious
consequences of magnesium deficiency. However, recent clinical studies have
shown that magnesium given intravenously, after myocardial infarction, improves
mortality rates. Moreover, recent published data have given the average
physician a much greater awareness of magnesium deficiency.
The current United States oral magnesium market is under $10 million,
but independent market research indicates that the total potential for current
future applications of magnesium is estimated to exceed $1 billion. This
estimated potential is based on physician surveys of intent to recommend an oral
magnesium supplement for certain conditions, as well as target population counts
of certain conditions where published scientific data links magnesium deficiency
as a complicating factor.
A recent Gallup poll revealed that 74% of the United States
population is magnesium deficient. Published articles indicate that the
conditions discussed above are often accompanied by magnesium deficiency. Based
on the target population counts of these conditions, there are at least 20
million people in the United States who could benefit from oral magnesium
supplementation from a product such as Mag-Tab(R)SR. In addition to such target
population potential, healthcare publications also discuss the potential value
of oral magnesium supplementation in other situations, thereby indicating that
the total United States market potential for magnesium products may actually
exceed 50 million people. In support of the prospects for a rapidly growing
magnesium market in the United States, a comparison may be made to the European
market, which represents 3% less than the United States. in terms of the world
healthcare dollar market (i.e. 28% vs 31%). However, consistent with its early
adoption of low cost nutritional usage, oral magnesium products in Europe are
approaching $500 million in sales. In France alone, with a population of only
20% of that in the United States, oral magnesium product sales exceeded $110
million in 1994.
Notwithstanding all the publicity that magnesium is receiving, the
Company believes it may still take several years and significant financial
resources to fully educate the majority of physicians on why and when to
routinely recommend a magnesium supplement. Part of the Company's marketing
strategy is to facilitate physician education and awareness of the potential of
magnesium products in order to achieve Mag-Tab(R)SR's full market potential.
30
Fiber
Dietary fiber refers to certain plant foods not digested in the human
small intestine. This includes relatively indigestible carbohydrates and
carbohydrate-like components of food, such as cellulose, lignin, hemicelluloses,
pentosans, gums and pectins.
All fibers can be grouped into two broad categories: water-insoluble
fibers, which include cellulose, lignin and many hemicelluloses; and soluble
fibers, which include pectin, gums, certain hemicelluloses and storage
polysaccharides. Unifiber(R) is composed of 75% powdered cellulose combined with
corn syrup solids and xanthan gum.
Physiological effects of dietary fibers differ in the small intestine
and colon. For example, fibers such as guar delay absorption and slow transit in
the small intestine, but are rapidly degraded by colonic bacteria and have a
relatively minor influence on colonic function. In contrast, cellulose and bran
(which is high in insoluble fiber) have little physiological effect on the small
intestine and undergo little degradation by colonic bacteria; however, both
accelerate colonic transit and increase stool bulk and weight.
In recent years, much has been written about the importance of
dietary fiber in a healthy diet and its recognized role in healthy bowel habits,
its possible benefits in a variety of conditions, including diverticulosis,
irritable bowel syndrome and glycemic responses in diabetics, elevated lipids
often associated with cardiovascular disease, and its possible protective
effects against colon cancer. Much of the impetus for study of dietary fiber in
these conditions (particularly colon cancer) has resulted from earlier
publications of epidemiological studies in diverse cultures and populations
consuming high-fiber diets. However, fiber is not the only variable to be taken
into account in establishing correlations. For example, the high fiber content
in these cultures and populations are also typically low in fat. Additionally,
significant differences in environment cannot be overlooked.
Recent animal and clinical pharmacology studies have attempted to
determine the role of high-fiber foods and certain fiber entities (including
cellulose) in the prophylaxis and/or treatment of specific diseases under more
controlled conditions. The data are not always consistent, however, and whether
or not a dietary supplement such as Unifiber(R), or any other dietary fiber, has
any meaningful effects to promote healthy bowel functions in these situations
has yet to be ascertained.
Although, as indicated above, there are certain as yet unresolved
questions regarding dietary fiber in disease therapy, there now appears to be no
question that fiber is considered an important part of the diet. In 1986, the
National Institutes of Health recommended that Americans increase their daily
fiber intake from about 11 grams per day to between 20 and 30 grams per day. The
preferred approach of healthcare professionals to accomplish this is by
increasing the intake of fiber- rich foods as part of a balanced diet. However,
it is also recognized that certain individuals cannot, or will not, consume
adequate amounts of fiber due to such reasons as poor dentition or palatability.
This situation is common among elderly and institutionalized individuals, for
example, which is significant in that these populations tend to be predisposed
to constipation. Fiber supplementation
31
is appropriate in these individuals, and the Company believes that the use of
Unifiber(R) as a dietary fiber supplement is well suited for such individuals
due to its flexibility in mixing with foods and its taste properties. Fiber
supplementation programs with Unifiber(R) in nursing homes support this position
and have been particularly helpful in promoting healthy bowel function without
laxatives.
The $250 million market for bulk fiber products has grown, and is
anticipated to continue to grow, for the foreseeable future at the approximate
rate of 15-20% per year. See "Business Competition". These dietary fiber
products are normally used to treat or prevent constipation by promoting normal
bowel function. The target populations that the Company believes would benefit
from daily fiber supplementation include:
- Individuals undergoing kidney dialysis;
- Institutionalized individuals who are in state hospitals or
extended care facilities;
- Individuals receiving enteral naso-gastric feedings;
- Pregnant women needing a pure fiber supplement without
aspartame as a sweetener;
- Individuals with bowel function problems associated with Diabetes.
Products
- --------
Mag-Tab(R)SR
Mag-Tab(R)SR is currently the only patented, true sustained release
magnesium supplement product on the market. The patent for Mag-Tab(R)SR is for
the formula composition and the manufacturing process that enables magnesium
L-lactate dihydrate to be compressed into a sustained release tablet formulation
containing 3-10 mEq of elemental magnesium lactate. The benefit of this patented
formulation is that its delivery mechanism releases a highly absorbable
magnesium lactate to the distal intestine, ensuring 10-12 hours of prolonged
absorption at any given pH level, without exceeding the renal threshold and
without the gastrointestinal side effects that are often seen with many
competitive brands. Mag-Tab(R)SR administration maintains higher serum levels
over a 12 hour period than its major competitor, SlowMag(R). Mag-Tab(R)SR's
patent expires in March 2008. See "Business - Competition" and "Business -
Patents and Proprietary Rights."
Mag-Tab(R)SR is currently marketed in caplet form packaged in 60
caplet and 100 caplet sizes. The Company also plans to market other dosage forms
of Mag-Tab(R)SR in the future, such as a liquid, a unit dosage and a combination
magnesium supplement product containing other nutrients.
Unifiber(R)
Unifiber(R) (comprised of 75% powdered cellulose) is a unique bulk
bowel management product which offers measurable differential advantages to its
users. Unifiber(R) is a non-patented proprietary dietary fiber supplement with
significant advantages over competitive brands. As compared to all other bulk
fiber supplements, Unifiber(R) requires no forced fluid intake, is electrolyte-
32
free, contains no aspartame, and is an ultrafine, tasteless, non-gelling powder
that mixes with virtually any soft food or liquid substance. See "Business -
Competition."
The Company plans to conduct a number of open label trials with key
physician groups, certified renal dieticians, and other decision makers of
long-term care facilities to promote Unifiber(R) acceptance with the target
groups discussed under "Business - Industry - Fiber" . No such trials have been
undertaken to date and the Company cannot predict the results of such trials.
Sales and Marketing
- -------------------
The Company uses a very selective and targeted approach to market its
products. Its overall strategy involves several steps, including securing
meaningful retail distribution and creating a loyal core base of physicians and
dietary specialists to recommend the use of the Company's products. In
implementing its strategy, the Company uses multiple promotional techniques to,
among others, 21,000 targeted physicians, including targeted direct mail, field
activity using its own or contracted sales forces, attendance at medical
conventions and meetings, developing product advocate programs, medical and
trade journal advertising, and telemarketing in the most lucrative metropolitan
and rural markets.
To create physician and healthcare professional awareness of
Mag-Tab(R)SR's benefits, the Company's marketing materials have focused
primarily on (i) education regarding magnesium deficiency, and (ii) emphasis on
the features and benefits of Mag-Tab(R)SR's unique sustained release formulation
as compared to competitive products.
The majority of bulk fiber product sales are accounted for by
physician recommendation and consumer purchases from retail pharmacies. The
Company's marketing strategy with Unifiber(R) is to focus on certain target
populations and market segments where fiber supplementation is important and
where the product's functions show it to be the product of choice. This
opportunity is with certain subsets of persons listed above in "Business -
Industry - Fiber", whose daily fiber supplementation requires special
consideration.
The Company employs a wholesale oriented policy for the supply of its
products. This practice results in greater profitability for the Company and
creates cooperation and goodwill with the wholesale drug and dietary supplement
distributors. The Company also offers incentive programs to its wholesalers
wherein the Company provides discounts in return for product promotion by the
wholesalers.
Currently, virtually all of the drug and dietary supplement
wholesalers in the United States stock two sizes of Mag-Tab(R)SR (60 and 100
caplet packages) and three sizes of Unifiber(R) (5 ounce, 9 ounce and 16 ounce
powdered cellulose packages) for the benefit of their retail and hospital
pharmacy customers. It is estimated that the current national retail
distribution has reached approximately 20% of all the retail outlets for
Mag-Tab(R)SR and slightly less for Unifiber(R). The Company is targeting the
proper corporate decision makers at major wholesale and chain pharmacy
33
headquarters and is developing particular marketing programs for these
customers with a view to improving overall distribution in the near future.
These marketing programs include, among other things, seminars tied into medical
and healthcare conventions to link the Company's products with the subject
matter of such conventions, the undertaking of a 12 month clinical study with a
view to presenting the results thereof in healthcare and consumer publications,
and the use of identified contractors for sales and marketing projects in order
for the Company to implement multimarket promotions of its products.
To complement these activities, direct mail promotional materials are
being mailed to approximately 65,000 targeted independent and chain pharmacists
in key metropolitan markets across the United States. Trade journal advertising
is also planned to help reinforce the distribution and physician marketing
programs. The Company believes that these tactics will improve Mag- Tab(R)SR and
Unifiber(R) availability in retail outlets and increase demand for the products.
However, based on results of operations to date and the limited time that the
Company has been implementing its marketing strategy, the Company cannot predict
the effect of its marketing strategies or whether they will be successful at
all.
The Company's direct customers for both Mag-Tab(R)SR and Unifiber(R)
comprise virtually all of the drug and dietary supplement wholesalers in the
United States, GPOs, and state and federal institutions, such as state and
county supported hospitals that are affiliated with medical schools and the
Veterans Administration hospital system. The following drug and dietary
supplement wholesalers, which supply retail and hospital pharmacies nationwide,
account for the following percentage of annual operating revenues of the Company
for the fiscal year ended December 31, 1995 and the nine months ended September
30, 1996, respectively: McKesson Drug Company, 25% and 19%; Cardinal Health
Company, 16% and 13%; Bergen Brunswig, 13% and 14%; and Amerisource Corporation,
13% and 13%. The Company believes that its relationship with these customers
is excellent. However, the loss of any one of these customers may have a
substantial adverse effect on the financial condition of the Company. See "Risk
Factors - Dependence on Major Customers".
GPOs and institutional and government accounts are growing markets
for the sale of Mag- Tab(R)SR and Unifiber(R). The Company utilizes direct
marketing strategies to help penetrate these markets by creating specifications
for the Company's products. Such strategies include providing bids to GPOs and
government institutions; encouraging selection of Company products due to cost
effectiveness and other previously discussed advantages over the competitive
products and therapies; and participating in state Medicaid reimbursement
programs.
In addition to the above programs and strategies, the Company intends
to initiate a press and other media release program through its advertising
agency to create product awareness and corporate image. In the past, these
tactics have been effective in generating new demand and creating opportunities
to evaluate new products, services and possible marketing/licensing agreements;
however, results of this program with GPOs and institutional and government
accounts cannot be predicted.
Within the United States, the Company distributes its products from
its warehouse in Roanoke, Texas (see "Business - Property") via UPS, Federal
Express, common carriers (both land and sea) or United States Postal Service.
The Company has virtually no backlog since orders are generally shipped out the
same day as they are received.
34
Foreign Distribution
- --------------------
The Company has a distribution agreement with Laboratorios Rider S.A.
("Laboratorios") of Santiago, Chile, pursuant to which Laboratorios is granted
the exclusive right to distribute and market Mag-Tab(R)SR in Chile and
Argentina (the "Laboratorios Agreement"). The initial term of the Laboratorios
Agreement expires in November 1997 and is automatically renewable for successive
three year periods unless terminated by either party at least 180 days prior to
the termination of the initial or any renewal term. Based on the Company's
current relationship with Laboratorios, the Company anticipates, but cannot
assure, that the Laboratorios Agreement will be renewed at the end of the
initial term.
In April 1996, the Company entered into an exclusive marketing and
distribution agreement with Corporation for Russian American Enterprise ("CRAE")
pursuant to which CRAE has the right to exclusively market and distribute
Mag-Tab(R)SR in Russia and the other republics comprising the former
Soviet Union (the "CRAE Agreement"). The 24-month term of the CRAE Agreement
commences on the first date that either of the Company's products is
commercially sold in CRAE's territory, which sales will be subject to prior
approval from the jurisdictions in its territory. The Company anticipates that
such approval will not be obtained in the foreseeable future, and the Company
does not anticipate that any material revenues will develop as a result of the
CRAE Agreement.
Both the Laboratories Agreement and the CRAE Agreement provide that
the Company will sell Mag-Tab(R)SR to each of the Laboratories and CRAE,
respectively, in no less than established minimum order amounts on an
established cost-plus basis. Both agreements provide for payment to the
Company not later than 60 days from the date of shipment.
To date, revenues from foreign sales have been nominal.
Manufacturing
- -------------
The Company does not currently manufacture its own products and has
no current plans to do so. It plans to continue to avoid this capital expense by
utilizing third party contract manufacturing in FDA-approved facilities.
Mag-Tab(R)SR
Mag-Tab(R)SR is manufactured and packaged by Schering, a major
FDA-regulated pharmaceutical company, via a long-term exclusive manufacturing
agreement (the "Schering Agreement"). The initial term of the Schering Agreement
expires in July 1997 and is automatically renewable for successive two year
terms thereafter unless written notice of termination is given by either party
at least one year prior to the expiration of the initial or successive term.
Since neither party has given any notice of termination, the expiration date of
the Schering Agreement has been extended to July 1999.
The Schering Agreement provides for the manufacture of Mag-Tab(R)SR
in compliance with FDA Good Manufacturing Practices standards ("GMPs") required
for the manufacture of FDA- regulated drugs, even though Mag-Tab(R)SR, as a
dietary supplement, currently need not comply with such drug product GMPs.
35
The Company believes that its relationship with Schering is excellent
and anticipates that its relationship will continue for the foreseeable future.
In the event the Schering Agreement is terminated or expires and the Company
does not renew its relationship with Schering, the Company believes, but cannot
assure, that it will be able to engage another third party to manufacture Mag-
Tab(R)SR in compliance with GMPs on terms comparable to those set forth in the
Schering Agreement. See "Risk Factors - No Manufacturing Capability or
Experience; Dependence on Others".
Unifiber(R)
The terms of the Dow Hickam Agreement, which covered the Company's
acquisition of Unifiber(R) from Dow Hickam provided for Dow Hickam to
manufacture and package Unifiber(R) until December 31, 1996 in quantities
sufficient to handle all projected sales by the Company through 1997. At the
date of the Prospectus, the Company had a 15 month inventory supply of
Unifiber(R) based on current sales levels. Since its manufacturing obligations
have expired, Dow Hickam no longer manufacturers Unifiber(R). The Company
anticipates, but cannot assure, that it will contract with at least one or
several other potential contract manufacturers for Unifiber(R) by the second
quarter of 1997 to manufacture Unifiber(R) on comparable terms with Dow
Hickam in compliance with FDA food GMPs at current manufacturing standards.
Dow Hickam has agreed not to compete with the Company with respect to
Unifiber(R) anywhere in the world until 2002. See "Risk Factors - No
Manufacturing Capability or Experience; Dependence on Others".
Although the Company's policy is to maintain an approximately three
month supply of each of Mag-Tab(R)SR and Unifiber(R), (of which, as noted
above, it has a 15 month supply) failure to engage or delays in engaging a
manufacturer for either product could result in the Company being unable to
fill orders on a timely basis, or at all, resulting in cancellation of
orders, reduced sales, loss of customers, loss of goodwill, and other events
which could have a material adverse effect on the Company. Additionally,
if the Company is unable to engage a manufacturer on terms at least as
favorable as the Schering Agreement or the arrangement with Dow Hickam, the
costs of goods sold may be raised, thereby reducing profit margins. See
"Risk Factors - No Manufacturing Capability or Experience; Dependence on
Others".
Competition
- -----------
The Company competes in both the magnesium supplement market and
dietary fiber market with companies that have substantially greater resources,
including capital, research and development resources, and manufacturing and
marketing capabilities with respect to well established products. Accordingly,
there can be no assurance that the Company will be able to compete successfully
with respect to either of its products.
Mag-Tab(R)SR
Because magnesium is presently emerging as a dietary supplement
(i.e. market of less than $10 million), there are few current competitors.
The market leader is G.D. Searle ("Searle"), which is estimated to possess more
than a 70% market share with its product, SlowMag(R). SlowMag(R) is an enteric
coated dosage form (not sustained-release) of magnesium chloride.
earle invested several
36
million dollars towards physician and pharmacy promotion when it launched this
product in 1989 and 1990 and, as a result, Searle has been a major factor in the
magnesium supplement market. SlowMag(R) is the only dietary supplement product
that Searle has in its product line. Even though Searle has greatly reduced its
promotional efforts with respect to SlowMag(R) in recent years, the product has
grown over 30% in unit volume since 1992.
The other major competitor of the Company in the magnesium supplement
market is Blaine Co., Inc. ("Blaine") whose product's trade name is MagOx(R)
(magnesium oxide tablets). Blaine, a company with no field sales force, has
gained significant market share from SlowMag(R) in recent years. MagOx's(R)
market share is currently approximately 15%, a position the Company believes
Blaine has accomplished through steady direct mail promotion to targeted
physicians and specialists.
Mag-Tab(R)SR's patented sustained release formulation provides
significant advantages over its major competitors, MagOx(R) and SlowMag(R).
Compared to MagOx(R), (i) Mag-Tab(R)SR's formula (magnesium L-lactate dihydrate)
is 600% more soluble at any given pH level, thus assuring better
bioavailability, and (ii) published data suggest that the insolubility of
magnesium oxide tablets (MagOx(R)) causes it to be poorly absorbed, thereby
leading to a high potential for gastrointestinal side effects such as diarrhea.
Compared to SlowMag(R), Mag-Tab(R)SR provides 33% more elemental magnesium per
dose, thus providing individuals with a dosage regimen requiring fewer tablets
at less daily cost. In addition, Mag-Tab(R)SR's 12-hour sustained release
formulation allows patients to take their dose twice daily, resulting in better
overall patient compliance.
Unifiber(R)
Currently, Proctor and Gamble is the leader in the dietary fiber
market, as its Metamucil(R) (psyllium) product line has an approximately 70%
market share. Metamucil(R) is promoted primarily via consumer advertising and
limited professional sampling. The Metamucil(R) product line is offered in a
wide range of flavors and sizes with each product containing almost a totally
different set of ingredients in the formulation. The Company believes that this
diversity, along with the numerous line extensions on the retail shelf, makes it
difficult for health care professionals and patients to determine the right
formula for their specific needs, as the various formulae may have different
effects on consumers who are pregnant or have renal disease or diabetes.
Other competitors in the dietary fiber market include SmithKline
Beecham with Citrucel(R) (methyl cellulose) (with approximately a 10% market
share), and several other companies that also have a psyllium product, such as
Konsyl(R) (with approximately a 5% market share). Citrucel(R)'s initial
promotional campaign focused on the non-gelling, better tasting, "low gas"
features of the product. After establishing an ethical base with the
gastroenterologist, Citrucel(R) marketing has shifted more towards the consumer.
Konsyl(R), owned by Konsyl Pharmaceuticals, Inc. ("Konsyl"), is an older
psyllium product similar to Metamucil(R), whose initial base of business was
established via ethical marketing to colo-rectal surgeons and
obstetrician/gynecologists. Currently, Konsyl continues to market to these
physician groups but has also initiated consumer promotion.
37
Compared to the aforementioned competitive products, the Company
believes that Unifiber(R) offers a number of unique advantages, including the
following: (i) there is no requirement for additional forced fluid intake, and
(ii) Unifiber(R) is electrolyte-free, contains no aspartame and is an ultrafine,
tasteless, non-gelling powder that mixes with virtually any soft food or liquid
substance. These characteristics are attractive to renal dieticians, home health
care professionals, diabetic educators, long-term care providers and consumers.
The Company's competitive position in both the magnesium and fiber
markets also depends on its ability to attract and retain qualified personnel,
obtain and defend patent and other intellectual property protection, or
otherwise develop or acquire proprietary products or processes, and secure
sufficient capital resources to manufacture, market, distribute and sell its
products. See "Risk Factors - Uncertainty of Protection of Patents and
Proprietary Rights" and "Risk Factors Dependence on Key Management and Qualified
Personnel".
Patents and Proprietary Rights
- ------------------------------
The Company owns a patent on Mag-Tab(R)SR in the United States, which
expires in March 2008. A patent application with respect to Mag-Tab(R)SR is
currently pending in Canada. Additionally, the trademark "Mag-Tab(R)SR" is a
registered trademark in the United States. Unifiber(R) is not patented; however,
Unifiber(R) is a registered trademark in the United States.
The Company's policy is to actively seek, when appropriate,
intellectual property protection for its products and proprietary information by
means of United States and foreign patents, trademarks and contractual
arrangements. In addition, the Company relies upon trade secrets and contractual
arrangements to protect certain of its proprietary information and products.
The Company's success will depend in part on its ability to enforce
its current patent, obtain patent protection for any products which may be
developed or acquired by the Company in the future, preserve its trade secrets,
and operate without infringing on the proprietary rights of third parties, both
in the United States and other countries. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and nutraceutical industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products and processes. There can be no assurance that the
Company will have sufficient resources to protect its patent from infringers,
that the Company will develop or acquire additional products that are patented
or patentable, or that present or future patents will provide sufficient
protection to the Company's present or future technologies, products and
processes. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information, design
around the Company's patent, or future patents, if any, or obtain access to the
Company's know-how, or that others will not successfully challenge the validity
of the Company's patents or be issued patents which may prevent the sale of one
or more of the Company's products, or require licensing and the payment of
significant fees or royalties by
38
the Company to third parties in order to enable the Company to conduct its
business. No assurance can be given as to the degree of protection or
competitive advantage the Company's current patent or any patents issued to, or
acquired by, the Company will afford, the validity of such patents, or the
Company's ability to avoid violating or infringing any patents issued to others.
Further, there can be no guarantee that any patents issued to, or licensed by,
the Company will not be infringed by products of others. Litigation and other
proceedings involving a defense and prosecution of patent claims can be
expensive and time consuming, even in those instances in which the outcome is
favorable to the Company, and can result in the diversion of resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties or require the Company to cease any related research and
development, and sales of infringing products. See "Risk Factors - Uncertainty
of Protection of Patents and Proprietary Rights".
The Company does not currently undertake basic research and
development activities to develop new products. Instead, the Company's strategy
is to contract with third party manufacturers or dietary supplement development
companies to formulate new dosage forms of its existing products and to target
for licensing or acquisition products that are already developed and tested.
This would also include existing products with sales revenues, which are
generally owned by large pharmaceutical or nutraceutical companies but which are
neglected by them. The Company depends on the unpatentable knowledge, experience
and skills of scientific and technical consultants to conduct clinical trials
commissioned by the Company from time to time, as well as to develop new
formulations of its existing products. The Company requires that each of its
executive employees, consultants, manufacturers, and distributors execute a
contract containing a confidentiality agreement with respect to the Company's
proprietary rights. There can be no assurance, however, that these agreements
will provide meaningful protection for the Company's proprietary information in
the event of an unauthorized use or disclosure of such confidential information.
Government Regulation
- ---------------------
The Company is subject to the Federal Food, Drug and Cosmetic Act
(including the Dietary Supplement Health and Education Act of 1994), the
Federal Trade Commission Act, the Fair Packaging and Labeling Act, the Consumer
Product Safety Act, the Federal Hazardous Substance Act and product safety
laws in foreign jurisdictions, as well as to the jurisdiction of the Consumer
Product Safety Commission. Such regulation subjects the Company to the
possibility of requirements of repurchase or recall of products found to be
defective and the possibility of fines, penalties, seizure of its products,
injunction and criminal prosecution for repeated violations. The FDA
regulates product labeling, including claims. In addition, the FTC regulates
product claims made in advertising. Existing and future governmental
regulations could impact certain products of the Company. Additionally,
products which the Company may acquire in the future (if any) may be subject to
FDA approval and regulation, which could be time consuming and costly. See
"Risk Factors - Possible Significant Impact of Consumer Laws and Government
Regulation on the Company's Business and Products".
39
Third Party Reimbursement
- -------------------------
Health care reform in the United States is currently an area of
national attention. Certain reforms may influence customer purchases and, if
adopted, could impose limitations on the prices the Company may be able to
charge in the United States, or on the amount of reimbursement available from
government agencies and private third party payors for magnesium supplements and
dietary fiber.
In the United States, the Health Care Financing Administration
("HCFA") establishes guidelines for coverage and the reimbursement of healthcare
providers treating Medicare and Medicaid patients. The Medicare program has
detailed coverage and reimbursement rules, but the program does not currently
provide reimbursements for drugs or nutritional supplements. The Medicaid
program, which is a Federal program, is state administered. Therefore, although
Medicaid reimbursement codes currently exist for Mag-Tab(R)SR and Unifiber(R),
HCFA does not control the policy of every state. At present, approximately 15
states approve patient reimbursement under Medicaid for the Company's products.
There can be no guarantee that Mag-Tab(R)SR, Unifiber(R) or any new products of
the Company will be covered in the future by Medicaid or other third party
payors, and, if covered, there can be no guarantee as to the level of
reimbursement that will be provided. See "Risk Factors - Uncertainty of Third
Party Reimbursement and Product Pricing".
Product Liability Insurance; Indemnification
- --------------------------------------------
The Company's business involves the inherent risk of product
liability claims. If such claims arise in the future, they could have a material
adverse impact on the Company. The Company maintains product liability insurance
on an occurrence basis in the amount of $3 million per occurrence and an
aggregate amount of $3 million per policy term period. The policy term of 12
months is renewable for successive 12 month periods. There is no assurance that
such coverage will be sufficient to protect the Company from risks to which it
may be subject, or that product liability insurance will be available to the
Company at a reasonable cost, if at all, in the future. Mag-Tab(R)SR and
Unifiber(R) have been on the market for approximately seven and twelve years,
respectively. The Company is not aware of any adverse side effects resulting
from the use of these products. However, the Company cannot assure that users
will not experience adverse side effects from these products in the future, or
that claims will not be brought against the Company arising from the use of
these products.
Additionally, the Company attempts to reduce its risk by obtaining
indemnity undertakings with respect to product liability claims from the third
party manufacturers of its products. The Company may acquire and market other
products in the future, which may be the subject of claims against the Company,
that may or may not be covered by any or adequate insurance or indemnities.
Currently, the Company is not aware of any pending or threatened claims against
it. See "Risk Factors - Potential of Material Adverse Effect of Product
Liability Claims on the Company".
40
Employees
- ---------
The Company currently has seven employees, three of whom are engaged
in direct sales and marketing activities. The remaining employees provide
services with regard to finance, administration, product development, and
customer service. No employees of the Company are covered by any collective
bargaining agreements, and management considers its employee relations to be
excellent. The Company intends to use part of the proceeds from this Offering to
hire additional employees in 1997, including a full-time controller, a national
field sales manager and six to twelve field sales representatives. See "Use of
Proceeds".
Property
- --------
The Company's principal executive offices and warehouse are located
at 200 North Oak, Roanoke, Texas, a 5,000 square foot leased facility. The lease
provides for a term ending on August 31, 2001 and a current monthly rental of
$2,000 (which increases in $200 increments each year until 2000) plus costs of
utilities and taxes. The lease is renewable for an additional five years by the
Company at a monthly rental of $2,600. The Company believes that its existing
facilities are adequate for the foreseeable future. Additionally, there is
unimproved space adjacent to the building, allowing for expansion of the current
facility if the Company determines that expansion is necessary. The lease grants
the Company an option to purchase the real property (including the Company's
premises and the adjacent space) for a period of 24 months commencing on
September 1, 1996 at a price equal to $20,000 above its market value as
determined by an appraiser. The Company has no current plans to exercise the
option, or lease or acquire any other real estate. See "Financial Statements -
Notes to Financial Statements 13 and 15[B]".
Litigation
- ----------
There is no litigation pending against the Company, nor is the
Company aware of any threatened litigation, or any proceeding contemplated by a
governmental authority, against it.
41
MANAGEMENT
The names and ages of, and the positions held by, the executive
officers and directors of the Company are set forth below.
Class of
Name Age Positions Held Directorship(1)
- ---- --- -------------- ---------------
Stephen F. Brandon 50 Chief Executive Officer, Class III
President, Treasurer and
Chairman of the Board
Thomas F. Reed 51 Executive Vice President - Class I
Corporate Development,
Secretary and Director
Jean R. Sperry 69 Vice President and Director Class II
Allan R. Avery 36 Director Class III
J. Leslie Glick 56 Director Class I
- --------------------
(1) The Company's Certificate of Incorporation provides for three
classes of directors. The term of each class is three years, except that the
initial term of office of the Class I directors will expire at the Company's
annual meeting of stockholders in 1997 and the initial term of office of the
Class II directors will expire at the Company's annual meeting in 1998.
Stephen F. Brandon has served as Chief Executive Officer, President
and Chairman of the Board of the Company since its inception in 1991. He was
elected Treasurer of the Company in October 1996. From 1988 to 1991, Mr. Brandon
pursued entrepreneurial activities and served as Executive Vice President of
Sales & Marketing at Lectus Associates, a pharmaceutical marketing firm created
by him and two other associates. From 1970 to 1988, Mr. Brandon held numerous
sales and sales management positions with Marion Laboratories, Inc. ("Marion"),
a major United States pharmaceutical company.
Thomas F. Reed has served as Executive Vice President-Corporate
Development and a director of the Company since 1991. Mr. Reed was elected
Secretary of the Company in October 1996. Prior to joining the Company, Mr. Reed
had a 21-year career with Marion, where he held various management positions,
including Director of Pharmaceutical Marketing, Company Vice President, and
President of the International Products Division. In such capacities, Mr. Reed
was responsible for overseeing the marketing of Marion's prescription products,
managing the strategic development and market introduction of Marion's two most
successful products (Cardizem (R) and Carafate (R)), and marketing,
manufacturing, licensing and distribution operations.
Jean R. Sperry has served as Vice President and a director of the
Company since 1991. Mr. Sperry is responsible for developing marketing
strategies, sales plans, and strategic alliances and devotes approximately 10%
of his working time to the Company's business. For more than 30 years prior to
joining the Company, Mr. Sperry served in various sales and marketing capacities
with Marion, including National Sales Manager, Vice President of Sales and
Senior Vice President of Marketing.
Allan R. Avery has been a director of the Company since February
1996. Since 1990, Mr. Avery has served as the President and Chief Executive
Officer of GEM Communications Inc., a health care communications company which
he founded. From 1990 to 1991, Mr. Avery was Vice President of Client Services
at PRO Communications, a pharmaceutical education project company. Prior
thereto, Mr. Avery held various sales and marketing positions at Marion during a
nine year career.
42
J. Leslie Glick, Ph.D. has been a director of the Company since
October 1996. Since 1992, Dr. Glick has been the Editor-in-Chief of Technology
Management, a management journal. He has also been an adjunct professor of
technology management in the Graduate School of Management & Technology at the
University of Maryland University College since 1988. Additionally, from 1987
to 1993, Dr. Glick served as Chief Executive Officer, President and Chairman of
the Board of Bionix Corporation, a biotechnology company. From 1977 to 1987, Dr.
Glick served as President and Chief Executive Officer of Genex Corporation, a
publicly-traded biotechnology company. Dr. Glick has also acted as a consultant
to the Underwriter since June 1996.
The Company has undertaken to have a designee of the Underwriter
serve as a director of the Company for a period of three years. The Company has
been advised by the Underwriter of its intention to designate Sherman A. Drusin
to such position.
Sherman A. Drusin has been the Director of Corporate Finance for the
Underwriter since March 1995. In addition, he is President and Director of
Preferred Benefit Plans, Inc., an estate planning company. Previously, he was
Vice President for Corporate Finance for J. Gregory & Company, an investment
banking firm. For 25 years prior to his work in the investment banking field,
Mr. Drusin was Chief Executive Officer, President and a director of several
computer software companies. He currently serves on the Board of Directors of In
Time Systems International Inc., a publicly-traded computer software and
consulting company, Applewood's, Inc., a publicly-traded distributor of beauty
and body care products, the Sterling Foster Foundation, and the Make-A-Wish
Foundation of Metro New York. Furthermore, he is an advisor to the Board of
Directors of several publicly-traded corporations.
There are no family relationships between the executive officers and
directors of the Company.
Executive Compensation
- ----------------------
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to, or on behalf of,
Mr. Brandon, the Company's Chief Executive Officer, during the last three fiscal
years. No executive officer of the Company had a combined salary and bonus in
excess of $100,000 for any year during such period.
43
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
---------------------- -------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All other
Positions Year Salary Bonus Compensation(1) Award(s) Options Payouts Compensation
- --------------- ---- ------ ------ --------------- ---------- ---------- ------- ------------
Stephen F. Brandon 1995 $48,000 - $12,000 - - - -
Chief Executive 1994 41,400 - 12,000 - - - -
Officer, President 1993 3,000 - 12,000 - - - -
and Chairman of the
Board
(1) Represents annual club dues paid by the Company on behalf of Mr. Brandon.
Each director of the Company is entitled to be reimbursed for
reasonable out-of-pocket expenses incurred in attending meetings of the Board of
Directors of the Company. The members of the Board of Directors intend to meet
at least quarterly.
Employment Agreements
- ---------------------
At the Closing of the Offering, the Company intends to enter into an
employment agreement with Mr. Brandon pursuant to which he shall serve as
the Company's Chief Executive Officer, President and Chairman of the Board
for a period of three years from the date of this Prospectus at a salary of
$120,000 per annum.
At the Closing of the Offering, the Company intends to also enter
into an employment agreement with Mr. Reed pursuant to which he shall serve
as the Company's Executive Vice President-Corporate Development for a period
of three years from the date of this Prospectus at a salary of $96,000 per
annum.
The employment agreements for Messrs. Brandon and Reed will each
further provide for reimbursement of business expenses. Additionally, Mr.
Brandon's employment agreement will provide for reimbursement of club dues not
to exceed $15,000 on an annual basis. The employment agreements will also
provide for the payment of full salary in the event of disability for three
months and 50% of salary if such disability continues for the next three month
period. The Company will have the right to terminate the employment agreements
in the event disability continues for more than six consecutive months or for
150 business days in any nine month period. The employment agreements will
contain a restrictive covenant precluding Messrs. Brandon and Reed,
respectively, from competing with the Company during the term, and for a period
of one year after the termination, of the employment agreement, without the
Company's consent. Furthermore, the employment agreements will entitle Messrs.
Brandon and Reed to participate in any health, compensatory or other plan or
program adopted by the Company for the benefit of its executive employees.
44
Stock Options
- -------------
1996 Senior Executive Stock Option Plan
In December, 1996, the Board of Directors of the Company adopted the
1996 Senior Executive Stock Option Plan (the "1996 Senior Executive Plan") which
provides for the grant of options to a certain senior management group for the
purchase of up to 405,000 Common Shares of the Company. The purpose of the 1996
Senior Executive Plan is to provide an incentive and reward for such senior
management group to contribute substantially to the progress and success of the
Company, to closely align the interests of such employees with the interests of
the stockholders of the Company by linking benefits to performance and to retain
the services of such employees. In furtherance of that purpose, the 1996 Senior
Executive Plan provides for the grant to Messrs. Brandon, Reed, Sperry and Avery
of options to purchase 283,500, 72,900, 24,300, and 24,300 Common Shares of the
Company, respectively, at an exercise price of $5.00 per share (the "Senior
Executive Plan Options"). The Senior Executive Plan Options shall terminate in
December 2006 and vest in one-third increments in each of 1998, 1999, and 2000
following the issuance of audited financial statements for the prior year,
provided the Company's cumulative pre-tax income from operations exceeds
$300,000 (without giving effect to any deferred financing cost resulting from
the issuance of 100,000 Common Shares to the Bridge Lender in the Company's
Bridge Financing transaction), $3,000,000 and $7,500,000 through the end of
the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999, respectively (the "Cumulative Goals"). In the event a particular
Cumulative Goal is not reached through December 31 of any given year, the
particular installment of such Senior Executive Plan Options will nevertheless
vest in a future year if the Cumulative Goal for a succeeding year is met.
Following the grant of the Senior Executive Plan Options described herein, no
further Senior Executive Plan Options will be available under the 1996 Senior
Executive Plan.
1996 Stock Option Plan
In February 1996, the Board of Directors of the Company adopted, and
the stockholders of the Company approved the adoption of, the 1996 Stock Option
Plan (the "1996 Option Plan") which provides for the grant of options for the
purchase of up to 131,250 Common Shares of the Company. The purpose of the 1996
Option Plan is to advance the interests of the Company by providing additional
incentive to, and to attract and retain, qualified competent employees,
non-employee directors, consultants and advisors through the encouragement of
stock ownership in the Company by such persons.
In February 1996, pursuant to the 1996 Option Plan, the Company
granted to Messrs. Reed and Sperry options to purchase 12,500 and 75,000 Common
Shares, respectively, at an exercise price of $1.50 per share. Messrs. Reed's
and Sperry's options vest in February 1997 and expire in February 2006.
45
In July 1996, pursuant to the 1996 Option Plan, the Company granted
to each of Mr. Avery and Dr. Glick options to purchase 12,500 Common Shares at
an exercise price of $1.50 per share. The options vest to the extent of 20% per
year over a period of five years commencing in July 1997 and terminate in July
2006. Other than the options already granted as described herein, no further
options will be granted under the 1996 Option Plan.
1996 Non-Senior Executive Stock Option Plan
In December 1996, the Company adopted and the stockholders approved
the 1996 Non- Senior Executive Stock Option Plan (the "1996 Non-Senior Executive
Plan") which provides for the grant of options to employees, non-employee
directors, consultants and advisors of the Company, other than eligible
optionees under the 1996 Senior Executive Plan, to purchase up to 150,000 Common
Shares. The purpose of the 1996 Non-Senior Executive Plan is to provide an
incentive and reward the eligible employees, non-employee directors, consultants
and advisors to contribute to the progress and success of the Company, to
closely align the interests of such eligible optionees with the interests of the
stockholders of the Company by linking benefits to performance, to retain the
services of such employees, non-employee directors, consultants and advisors,
and to attract new employees, non-employee directors, consultants and advisors.
No options have been granted under the 1996 Non-Senior Executive Plan as of the
date of this Prospectus.
No options were granted during the fiscal year ended December 31,
1995 to any executive officer of the Company. As of December 31, 1995, no
options were held by any executive officer of the Company.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of
this Prospectus with respect to the beneficial ownership of the outstanding
Common Shares of the Company by (i) any holder of more than 5% of the
outstanding Common Shares; (ii) the Company's directors; and (iii) the directors
and executive officers of the Company as a group; and (iv) the Selling
Stockholder:
46
Number of Number of
Common Number of Common
Shares Common Shares
Beneficially Percentage of Shares Beneficially Percentage of
Name and Address of Owned Prior Class Prior to Offered Owned After Class After
Beneficial Owner to Offering Offering Hereby Offering Offering (1)
- ---------------- ----------- -------------- --------- ------------ ------------
Stephen F. Brandon 731,500(2)(3) 66.4% -0- 731,500(2)(3) 30.5%
200 North Oak
P.O. Box 449
Roanoke, Texas
Jean R. Sperry 122,500(3)(4) 10.4% -0- 122,500(3)(4) 4.9%
200 North Oak
P.O. Box 449
Roanoke, Texas
Dominant Construction
Corp. 100,000 (5) 9.1% 100,000(6) -0- --
523 Route 303
Orangeburg, New York
Thomas F. Reed 98,000(3)(7) 8.8% -0- 98,000(3)(7) 4.1%
12704 Eaton Circle
Leawood, Kansas
Gerald L. Beckloff,
M.D 75,500 6.9% -0- 75,500 3.1%
Commerce Plaza II,
Suite 720
7400 West 110th Street
Overland Park, Kansas
Allan R. Avery 15,000(3) 1.4% -0- 15,000(3) *
40 Richards Avenue
Norwalk, Connecticut
J. Leslie Glick -0- -0- -0- -0- --
10899 Deborah Drive
Potomac, Maryland
All Directors and
executive officers 967,000(2)(3) 81.3% -0- 967,000(2)(3) 38.9%
as a group (five (4)(6) (4)(6)
persons)..........
- --------------------
* Less than 1%
(1) Does not give effect to the exercise of the Underwriter's Overallotment
Option or the Underwriter's Warrant. See "Underwriting".
(2) Mr. Brandon's shares are pledged as security for the epayment of
indebtedness. See "Principal and Selling Stockholders-Changes in Control".
(3) Does not include shares issuable upon the exercise of options granted under
the 1996 Senior Executive Plan, the exercisability of which is subject to
the attainment of certain performance goals. See "Management-Stock
Options".
47
(4) Includes 75,000 share issuable upon the exercise of options which are
exercisable within 60 days of the date hereof. See "Management-Stock
Options".
(5) Alexa Dove is the sole stockholder, director and officer of Dominant
Construction Corp. (the "Selling Stockholder"). Peter M. Dove is the
General Manager of the Selling Stockholder and the husband of Alexa Dove.
Both Alexa and Peter M. Dove may be deemed to be beneficial owners of the
Common Shares owned by the Selling Seockholder.
(6) As noted below, the Selling Stockholder has agreed that it will not
transfer any of its Common Shares for a period of two years following the
date of this Prospectus without the prior consent of the Underwriter.
(7) Includes 12,500 shares issuable upon the exercise of options which are
exercisable within 60 days of the date hereof. See "Management-Stock
Options".
The Registration Statement, of which this Prospectus forms a part,
also covers the resale of 100,000 Common Shares issued to the Selling
Stockholder by the Company in connection with the Bridge Financing completed in
December 1996. See "Bridge Financing".
The Company will not receive any of the proceeds from the resale of
the Common Shares by the Selling Stockholder. The Common Shares held by the
Selling Stockholder may be resold at any time following the date of this
Prospectus, subject to an agreement between the Selling Stockholder and the
Underwriter restricting the transfer of the Common Shares for a period of two
years without the Underwriter's consent. The Underwriter has advised the
Company that it will not waive the transfer restriction with respect to
the Selling Stockholder for 30 days following the date of this Prospectus, and
that it has no plans to waive such transfer restriction prior to its expiration.
However, the Underwriter has informed the Company that it may contemplate the
waiver of such transfer restriction in the future if the sale of the Selling
Stockholder's Common Shares would not have an adverse effect on the market price
of the Company's Common Shares and the market could sustain such sale. The
foregoing notwithstanding, the sale of such Common Shares or the potential of
such sales at any time may have an adverse effect on the market prices of the
Common Shares offered hereby. See "Risk Factors-Shares Eligible For Future
Sale May Adversely Affect the Market".
The Common Shares offered may be sold from time to time directly by
the Selling Stockholder. Alternatively, the Selling Stockholder may from time to
time offer such Common Shares through underwriters, dealers, or agents. The
distribution of Common Shares by the Selling Stockholder may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholder in connection with such sales of Common Shares. The Common Shares
offered by the Selling Stockholder may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the Common Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (ii)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions in which the broker solicits purchasers; and (iv) face-to-face
transactions between seller and purchasers without a broker-dealer. In effecting
sales, brokers or dealers engaged by the Selling Stockholder may arrange for
other brokers or dealers to participate . The Selling Stockholder, and
intermediaries through whom such Common Shares are sold, under certain
circumstances, may be deemed "underwriters" within the meaning of the Act with
respect to the Common Shares offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time a particular offer of Common Shares is made by or on
behalf of the Selling Stockholder, to the extent required, a Prospectus
Supplement will be prepared which will set forth the number of Common Shares
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, the purchase price paid by any underwriter for
48
Common Shares purchased from the Selling Stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Changes in Control
- ------------------
Mr. Brandon has pledged to the First National Bank of Grapevine,
Grapevine, Texas (the "Lender") and the United States Small Business
Administration (the "SBA") all of his 731,500 Common Shares of the Company,
representing approximately 66% of the Common Shares outstanding prior to the
Offering and 30% of the Common Shares after the Offering (assuming the
Underwriter's Overallotment Option is not exercised). Such pledge was made in
furtherance of a loan by the Lender in the original principal amount of $250,000
to the Company and a guaranty of the loan by the SBA. In the event of a default
under the loan (the principal amount of which as of September 30, 1996 was
$113,000), the Lender and the SBA have the right to foreclose on the Common
Shares which could result in, among other things, the Lender and the SBA
obtaining voting control over a significant portion of the outstanding Common
Shares of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is obligated to repay to Mr. Brandon a loan in the
outstanding principal amount of $295,487 (the "Brandon Loan"). The Brandon Loan
accrues interest at the rate of 10% per annum, payable monthly, and is payable
on January 11, 1998. The Brandon Loan, originally in the principal amount of
$500,000, was made on January 11, 1991 and the term has been renewed for
successive one year terms each year since January 1992. The Company intends to
prepay the remaining principal balance out of the proceeds of this Offering. See
"Use of Proceeds."
In January 1997, the Company entered into an unsecured Credit
Agreement with GEM Communications, Inc. ("GEM"), an entity wholly owned by Allan
R. Avery, a director of the Company, which provides for the Company to borrow up
to $150,000. The Credit Agreement further provides that all amounts borrowed
shall be repaid in full on or before January 20, 1998. Interest accrues on the
unpaid principal at the rate of 10% per annum and is payable upon demand. At
the date of this Prospectus, the Company has borrowed $75,000 under the Credit
Agreement, all of which is outstanding. As further consideration to enter into
the Credit Agreement, the Company issued to GEM warrants to purchase 30,000
Common Shares of the Company at an exercise price of $6.00 per share, such
warrants being exercisable for a period of five years commencing on the first
anniversary date of this Prospectus. The Company entered into the Credit
Agreement because it required additional financing to fund the Company's working
capital needs and no other sources of financing were available to the Company at
that time. The Company believes that the terms of the Credit Agreement and the
warrant are commercially reasonable and are at least as favorable as the Company
could have obtained from an unrelated third party. Amounts borrowed under the
Credit Agreement will be repaid out of operating revenues of the Company. No
part of the proceeds in this Offering will be utilized to repay the GEM loan.
To the extent that the Company may enter into any agreements with
related parties in the future (of which none are presently contemplpated), the
Company anticipates that the terms of such agreements will be commercially
reasonable and no less favorable to the Company than the Company could obtain
from unrelated third parties. Additionally, the Company intends that such
agreements will be approved by a majority of disinterested directors.
DESCRIPTION OF SECURITIES
Common Shares
- -------------
The Company is authorized to issue up to 15,000,000 Common Shares,
par value $.01 per share, of which 1,101,500 shares are issued and outstanding
as of the date of this Prospectus. All of the issued and outstanding Common
Shares are validly issued, fully paid and non-assessable.
Holders of the Common Shares of the Company are entitled to share
equally on a per share basis in such dividends as may be declared by the Board
of Directors out of funds legally available therefor. There are presently no
plans to pay dividends with respect to the Common Shares. See "Dividend Policy."
Upon liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
Preferred Shares, if any, the assets of the Company will be divided pro rata on
a per share basis among the holders of the Common Shares. The Common Shares are
not subject to any liability for further assessments. There are no conversion or
redemption privileges nor any sinking fund provisions with respect to the
49
Common Shares, and the Common Shares are not subject to call. The holders of the
Common Shares do not have any preemptive or other subscription rights.
Holders of the Common Shares are entitled to cast one vote for each
share held at all stockholders' meetings, including the annual meeting for the
election of directors. The Common Shares do not have cumulative voting rights.
The Company has agreed with the Underwriter that it will not issue
any Common Shares (other than pursuant to outstanding options and warrants, the
Underwriter's Warrant, or grants under the 1996 Non-Senior Executive Plan) for a
period of three years from the date of the Prospectus without the prior written
consent of the Underwriter. See "Underwriting".
Preferred Shares
- ----------------
The Company's Certificate of Incorporation authorizes 2,000,000
"blank check" Preferred Shares, par value $.01 per share, whereby the Board of
Directors of the Company shall have the authority, without further action by the
holders of the outstanding Common Shares, to issue Preferred Shares from time to
time in one or more series, to fix the number of shares constituting any series
and the stated value thereof, if different from the par value, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such series. As of the date of this Prospectus, there are no Preferred Shares
issued and outstanding, and the Company has no plans to issue any Preferred
Shares. The Company has agreed with the Underwriter that it will not issue any
Preferred Shares for a period of three years from the date of this Prospectus
without the prior written consent of the Underwriter. See "Underwriting".
Delaware Anti-Takeover Law
- --------------------------
The Company is governed by the provisions of Section 203 of the
General Corporation Law of Delaware, an anti-takeover law enacted in 1988. In
general, the law prohibits a Delaware public corporation from engaging in a
'business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner. As a result of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect acquisition transactions with the Company, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors; Indemnification
- -----------------------------------------------------
Article X of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Section 102 of the Delaware General Corporation Law.
50
This provision, however, does not eliminate or limit the liability of a director
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the Delaware General Corporation Law (with respect to unlawful
dividend payments and unlawful stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation law. The
Delaware General Corporation law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws or any agreement, or by vote of stockholders, or otherwise.
The effect of the foregoing is to require the Company, to the extent
permitted by law, to indemnify the directors, officers, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the Prospectus,
or any such amendment or supplement thereto.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
The Company intends to obtain liability insurance coverage for its
officers and directors in the amount of $1,000,000 per person.
Transfer Agent
- --------------
The transfer agent for the Company's Common Shares is Continental Stock
Transfer and Trust Company.
51
UNDERWRITING
General
- -------
Subject to the terms and conditions of the Underwriting Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase the 1,300,000
Common Shares offered hereby from the Company on a "firm commitment" basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer the Common Shares to the public at a price of $5.00 per Common Share, as
set forth on the cover page of this Prospectus, and that it may allow to certain
dealers who are NASD members concessions not to exceed $____ per Common Share,
of which an amount not in excess of $___ per Common Share may be reallowed to
other dealers who are members of the NASD. After the Offering, the public
offering price, concession and reallowance may be changed by the Underwriter.
The Company has granted an Overallotment Option to the Underwriter,
exercisable during the 45 day period from the date of this Prospectus, to
purchase up to a maximum of 195,000 additional Common Shares at the Offering
price, less the underwriting discount, to cover overallotments, if any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities arising under
the Act. Insofar as indemnification for liabilities arising under the Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that, in the opinion of the Commission, such indemnification
is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of equal to 3% of the aggregate Offering price of the Common
Shares offered hereby, including any Common Shares purchased pursuant to the
Overallotment Option.
The Company has agreed to sell to the Underwriter, or its designees,
for an aggregate purchase price of $100, a warrant (the "Underwriter's Warrant")
to purchase 130,000 Common Shares. The Underwriter's Warrant shall be
exercisable during a three year period commencing one year from the Effective
Date. Any profits realized upon the sale of the Common Shares issuable upon
exercise of the Underwriter's Warrant may be deemed to be additional
underwriting compensation. The exercise price of the Common Shares issuable upon
exercise of the Underwriter's Warrant shall be $7.50 per share (150% of the
initial public offering price of the Common Shares). The exercise price of the
Underwriter's Warrant and the number of Common Shares covered thereby are
subject to adjustment in certain events to prevent dilution. For the life of the
Underwriter's Warrant, the holders thereof are given, at a nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Shares with a resulting dilution in the interest of other stockholders. The
Company may find it more difficult to raise capital for its
52
business if the need should arise while the Underwriter's Warrant is
outstanding. At any time when the holders of the Underwriter's Warrant might be
expected to exercise it, the Company would probably be able to obtain additional
capital on more favorable terms. The Company has granted the Underwriter certain
"demand" and "piggyback" registration rights with respect to the Underwriter's
Warrant and the underlying Common Shares.
Upon the closing of the sale of the Common Shares offered hereby, the
Company will enter into a three year financial advisory and investment banking
agreement with the Underwriter, pursuant to which the Company will be obligated
to pay the Underwriter $100,000 in advance for financial and investment advisory
services to the Company.
Additionally, for a period of three years following the date of this
Prospectus, the Underwriter has been granted the right to purchase from any
officer, director or holder of 5% or more of the Company's Common Shares, or
any of their respective affiliates (collectively, the "Insiders"), for its
account, or to sell for the account of any of such Insiders, any of the
Company's securities which the Insiders propose to sell pursuant to Rule 144
promulgated under the Act, on terms at least as favorable as the Insiders can
secure elsewhere.
The Company has also agreed to have a designee of the Underwriter
serve as a director of the Company, or as an observer of the Board of Directors,
for a period of three years following the date of this Prospectus. See
"Management".
The Insiders and the Selling Stockholder have agreed that they will
not transfer any of their Common Shares for a period of two years following the
date of this Prospectus without the prior consent of the Underwriter.
The Underwriter has advised the Company that it will not waive the
transfer restrictions with respect to the Selling Stockholder for 30 days
following the date of this Prospectus, and that in any event, it has no plans to
waive such transfer restriction prior to its expiration. However, the
Underwriter has informed the Company that it may contemplate the waiver of such
transfer restriction in the future if the sale of the Selling Stockholder's
Common Shares would not have an adverse effect on the market price of the
Company's Common Shares and the market could sustain such sale. In addition,
all other persons who are holders of the Company's Common Shares
immediately prior to the date of this Prospectus have agreed that they will not
transfer their Common Shares for a period of six months following the date of
this Prospectus, without obtaining the prior consent of the Underwriter. See
"Principal and Selling Stockholders".
The Company has agreed not to issue any securities for a period of
three years from the date of this Prospectus, without prior written consent of
the Underwriter (not to be unreasonably withheld), subject to certain
exceptions. See "Description of Securities".
The Underwriter, a registered broker-dealer, purchases and sells
securities on behalf of its customers. The Underwriter also engages in
investment banking activities and provides companies with financial advisory
services.
The Underwriter does not intend to sell any of the Company's Common
Shares to accounts for which it exercises discretionary authority.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Warrant which have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
53
Determination of Public Offering Price
- --------------------------------------
Prior to this Offering, there has been no public market for the
Common Shares. The initial public offering price for the Common Shares has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in the negotiations were an analysis of the areas of activity
in which the Company is engaged, the present state of the Company's business,
the Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
public offering price of the Shares does not necessarily bear any relationship
to assets, earnings, book value or other criteria of value applicable to the
Company. See "Risk Factors - Arbitrary Offering Price; Possible Volatility of
Stock Price".
The Company anticipates that the Common Shares will be listed for
quotation on The Nasdaq SmallCap Market under the symbol "NCHE", but there can
be no assurance that an active trading market will develop, even if the
securities are accepted for quotation. The Underwriter intends to make a market
in the Common Shares of the Company. See "Risk Factors - NASD Complaint Against
Underwriter and Others Alleging Violations of Exchange Act and NASD Rules of
Fair Practice" and "Risk Factors - Private Investigation Concerning Trading in
Securities of Issuer Underwritten by Underwriter".
LEGAL MATTERS
The validity of the securities being offered hereby will be passed
upon for the Company by Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue,
East Meadow, New York 11554. Certilman Balin Adler & Hyman, LLP has served, and
continues to serve, as counsel to the Underwriter in matters unrelated to this
Offering. Certain legal matters will be passed upon for the Underwriter by
Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York
10022.
EXPERTS
The financial statements of the Company as of December 31, 1995 and
for the years ended December 31, 1995 and 1994 included in this Prospectus have
been audited by Moore Stephens, P.C., 331 Madison Avenue, New York, New York
10017, independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
54
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form
SB-2 filed by the Company with the Commission under the Act and omits certain
information contained in the Registration Statement. Reference is hereby made to
the Registration Statement and to its exhibits for further information with
respect to the Company and the Common Shares offered hereby. Statements
contained herein concerning provisions of documents are necessarily summaries of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, Washington, D.C. 20549, and at the offices of
the Commission located at 7 World Trade Center, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549 at prescribed rates.
Furthermore, the Commission maintains a Web site that will contain reports,
proxy and information statements and other information regarding the Company.
The address of such Web site is http://www.sec.gov.
GLOSSARY
As used in this Prospectus, the terms set forth have the following
meanings:
amino glycosides - bactericidal antibiotics used primarily in the treatment of
gram negative infections.
aspartame - an artificial sweetener (a compound formed from two amino acids,
phenylalanine and aspartate, and methanol).
bioavailability - an absolute term that indicates measurement of both the rate
and total amount (extent) of supplement or nutrient that reaches the general
circulation from an administered dosage form.
cellulose - a fibrous form of polysaccharide constituting the supporting
framework of plant.
co-morbid - joint factor related to disease.
cofactor - the substance that activates an enzyme.
dentition - the process and time of teething.
distal - farthest point of the medical line when referencing the anatomy of a
living organism.
55
diverticulosis - inflammation in the intestinal tract.
elemental magnesium - the absolute amount of the mineral magnesium contained in
the salt presentation (e.g. the amount of magnesium cation in magnesium
L-lactate dihydrate).
enteral - within or by way of the intestine.
enteric - pertaining to the intestinal tract.
enzymatic reaction - a catalytic reaction produced by living cells.
epidemiological - pertaining to the study of infectious disease.
ethical pharmaceutical - refers to pharmaceuticals that are dependent on
healthcare professionals' recommendation or prescription for use.
glycemic- condition of sugar or glucose in the blood.
guar - a legume.
gum - any resinlike substance given off by plants.
hemicellulose - a polysaccharide that is intermediate in complexity between
sugar and cellulose.
intracellular cation - magnesium, potassium, calcium and sodium are the four
major cations or positively charged ions in fluids. Their relative
concentrations determine the integrity of the cell membrane and the electrical
potential of tissues. All of the cations work together to maintain proper cell
function.
lignin - a polymer that functions as a natural binder and support for the
cellulose fiber of woody plants.
lipid - fats that are insoluble in water.
magnesium L-lactate dihydrate- a highly soluble magnesium salt containing 10%
elemental magnesium by weight (e.g. 850 milligrams of magnesium L-lactate
dihydrate contains 84 milligrams of elemental magnesium).
metabolic electrolyte - electrically conducting ions, i.e. negatively or
positively charged atoms, that are associated with the chemical process of
maintaining life.
myocardial infarction - development of an area of necrotic tissue in the heart.
56
naso-gastric - the area between the nasal cavity and the stomach.
nutraceutical - pertaining to nutritional supplements.
pectin - a plant carbohydrate that forms a gelatinous mass.
pentogens - any one of a group of complex carbohydrates found with cellulose in
many woody plants and yielding pentoses, i.e. five-carbon sugars, upon
hydrolysis.
pharmaceutical - an oral, injectable, liquid, or topical dosage form of a
chemical entity dispensed by healthcare professionals.
pharmacologic - the activity of a supplement or nutrient which will produce a
physiologic or qualitatively different effect in a living organism.
physiologic - the dose of a naturally occurring agent, within the range of
concentrations or potencies that would occur naturally, capable of affecting the
activity, functions, and/or processes of a living organism.
polysaccharide - a carbohydrate consisting of a polymer of simple sugars, which,
as a dietary or nutritional supplement, is capable of affecting the activities,
functions, and/or processes of a living organism.
prophylaxis - the preventive treatment of disease.
renal - pertaining to, or in the region of, the kidneys.
serum - the liquid portion of whole blood.
ventricular arrhythmias - an irregularity of the heart's action affecting one of
the lower chambers of the heart, which propel blood into the arteries.
57
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report....................................... F-1....
Balance Sheets as of September 30, 1996
[Unaudited] and December 31, 1995.................................. F-2.... F-3
Statements of Operations for the nine
months ended September 30, 1996 and 1995
[Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-4....
Statements of Stockholders' [Deficit]
for the nine months ended September 30,
1996 [Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-5....
Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995
[Unaudited] and for the years ended
December 31, 1995 and 1994......................................... F-6.... F-7
Notes to Financial Statements...................................... F-8.... F-17
. . . . . . . . . . . . . . .
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Niche Pharmaceuticals, Inc.
Roanoke, Texas
We have audited the accompanying balance sheet of Niche
Pharmaceuticals, Inc. as of December 31, 1995, and the related statements of
operations, stockholders' [deficit], and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Niche
Pharmaceuticals, Inc. as of December 31, 1995, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements and as discussed in Note 3 to the financial statements, the
Company has suffered recurring losses since its inception in 1991; has an
accumulated deficit at December 31, 1995 of $617,961; and has a working capital
deficit of $67,504. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
November 15, 1996
F-1
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
1 9 9 6 1 9 9 5
[Unaudited]
Assets:
Current Assets:
Cash $ 21,237 $ 156,772
Accounts Receivable 217,188 84,656
Inventory 56,729 105,401
--------------- ---------------
Total Current Assets 295,154 346,829
--------------- ---------------
Property and Equipment - Net 13,724 20,173
--------------- ---------------
Other Assets:
Intangible Assets - Net 1,059,740 1,140,166
Miscellaneous Receivable and Deposit 1,027 6,028
Deferred Offering Costs 47,364 --
--------------- ---------------
Total Other Assets 1,108,131 1,146,194
--------------- ---------------
Total Assets $ 1,417,009 $ 1,513,196
=============== ===============
Substantially all assets are pledged.
The Accompanying Notes are an Integral Part of These Financial Statements.
F-2
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
1 9 9 6 1 9 9 5
[Unaudited]
Liabilities and Stockholders' [Deficit]:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 121,150 $ 73,952
Note Payable - Bank 300,000 300,000
Current Portion of Long-Term Debt 42,952 40,381
Notes Payable - Product Acquisition and Financing 200,000 --
--------------- ---------------
Total Current Liabilities 664,102 414,333
--------------- ---------------
Long-Term Liabilities:
Long-Term Debt - Less Current Maturities 70,873 103,679
Note Payable - Product Acquisition and Financing 931,584 1,046,780
Notes Payable - Stockholders 407,987 465,365
--------------- ---------------
Total Long-Term Liabilities 1,410,444 1,615,824
--------------- ---------------
Commitments and Contingencies [14] -- --
--------------- ---------------
Stockholders' [Deficit]:
Preferred Stock, $.01 Par Value, 2,000,000 Shares
Authorized, No Shares Issued and Outstanding -- --
Common Stock, $.00105 Par Value, 15,000,000 Shares
Authorized, 1,001,500 and 1,000,000 Shares Issued
and Outstanding in 1996 and 1995, Respectively 1,052 1,050
Additional Paid-in Capital 99,960 99,950
Accumulated [Deficit] (758,549) (617,961)
--------------- ---------------
Total Stockholders' [Deficit] (657,537) (516,961)
--------------- ---------------
Total Liabilities and Stockholders' [Deficit] $ 1,417,009 $ 1,513,196
=============== ===============
The Accompanying Notes are an Integral Part of These Financial Statements.
F-3
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
Revenues:
- ---------
Sales - Net $ 906,744 $ 323,553 $ 540,121 $ 415,330
Other Revenues -- 66,147 66,147 --
--------------- ---------------- --------------- --------------
Total Revenues 906,744 389,700 606,268 415,330
Cost of Sales 342,362 86,113 183,146 135,472
--------------- ---------------- --------------- ---------------
Gross Profit 564,382 303,587 423,122 279,858
Selling, General and
Administrative Expenses 563,612 211,682 334,941 275,350
--------------- ---------------- --------------- ---------------
Income from Operations 770 91,905 88,181 4,508
--------------- ---------------- --------------- ---------------
Other [Expense] Income:
Interest Expense (144,042) (55,056) (91,800) (67,274)
Interest Income 2,684 918 2,616 426
--------------- ---------------- --------------- ---------------
Other [Expense] (141,358) (54,138) (89,184) (66,848)
--------------- ---------------- --------------- ---------------
Net [Loss] Income $ (140,588) $ 37,767 $ (1,003) $ (62,340)
=============== ================ =============== ===============
Net [Loss] Income Per
Share $ (.13) $ .03 $ -- $ (.06)
=============== ================ =============== ===============
Weighted Average Number
of Shares 1,101,500 1,101,500 1,101,500 1,101,500
=============== ================ =============== ===============
The Accompanying Notes are an Integral Part of These Financial Statements.
F-4
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' [DEFICIT]
- --------------------------------------------------------------------------------
Common Stock Additional Total
Number of Par Value Paid-in Accumulated Stockholders'
Shares [$.00105] Capital [Deficit] [Deficit]
------ ------- ------- -------
Balance - January 1,
1994 950,000 $ 998 $ 2 $ (554,618) $ (553,618)
Stock Issuance 27,500 28 54,972 -- 55,000
Net [Loss] -- -- -- (62,340) (62,340)
--------------- -------------- --------------- -------------- --------------
Balance - December 31,
1994 977,500 1,026 54,974 (616,958) (560,958)
Stock Issuance 22,500 24 44,976 -- 45,000
Net [Loss] -- -- -- (1,003) (1,003)
--------------- -------------- --------------- -------------- --------------
Balance - December 31,
1995 1,000,000 1,050 99,950 (617,961) (516,961)
Stock Issuance 1,500 2 10 -- 12
Net [Loss] -- -- -- (140,588) (140,588)
--------------- -------------- --------------- -------------- --------------
Balance - September 30,
1996 [Unaudited] 1,001,500 $ 1,052 $ 99,960 $ (758,549) $ (657,537)
=============== ============== =============== ============== ==============
The Accompanying Notes are an Integral Part of These Financial Statements.
F-5
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
Operating Activities:
Net [Loss] Income $ (140,588) $ 37,767 $ (1,003) $ (62,340)
--------------- ---------------- --------------- ---------------
Adjustments to Reconcile Net [Loss]
Income to Net Cash [Used for]
Provided by Operating Activities:
Depreciation and Amortization 88,044 25,081 51,626 33,997
Amortization of Imputed Interest
Discount 84,804 -- 18,845 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (132,532) (16,315) (61,139) 2,119
Inventory 48,673 (3,158) (94,514) 17,162
Other Assets 5,000 (5,000) (5,488) 463
Increase [Decrease] in:
Accounts Payable and Accrued
Expenses 47,198 (28,995) 2,516 (34,656)
--------------- ---------------- --------------- ---------------
Total Adjustments 141,187 (28,387) (88,154) 19,085
--------------- ---------------- --------------- ---------------
Net Cash - Operating Activities 559 9,380 (89,157) (43,255)
--------------- ---------------- --------------- ---------------
Investing Activities:
Purchases of Property and
Equipment (1,169) (7,480) (14,745) (407)
Payment for Purchases of Intangible
Assets -- -- (59,469) --
--------------- ---------------- --------------- ---------------
Net Cash - Investing Activities (1,169) (7,480) (74,214) (407)
--------------- ---------------- --------------- ---------------
Financing Activities:
Principal Payments on Long-Term
Debt (30,235) (30,138) (35,381) (33,720)
Principal Payments on Notes Payable -
Stockholders (57,378) (2,300) (33,974) --
Proceeds of Note Payable - Bank -- -- 300,000 --
Proceeds from the Issuance of
Capital Stock 12 45,000 45,000 55,000
[Repayment] Proceeds of
Stockholders' Loans -- (14,300) (14,300) 14,300
Payment for Deferred Offering Costs (47,364) -- -- --
----------- ------ ------- ----
Net Cash - Financing Activities (134,965) (1,738) 261,345 35,580
--------------- ---------------- --------------- ---------------
Net [Decrease] Increase in Cash (135,535) 162 97,974 (8,082)
Cash - Beginning of Periods 156,772 58,798 58,798 66,880
--------------- ---------------- --------------- ---------------
Cash - End of Periods $ 21,237 $ 58,960 $ 156,772 $ 58,798
=============== ================ =============== ===============
The Accompanying Notes are an Integral Part of These Financial Statements.
F-6
NICHE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine months ended Years ended
September 30, December 31,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
[Unaudited] [Unaudited]
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 65,838 $ 55,548 $96,046 $76,769
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
The Company purchased the rights, title and interest in a pharmaceutical
product [See Note 4]. In connection with the purchase, the Company paid $200,000
during 1995 and assumed an obligation discounted to its net present value at the
date of acquisition of $1,227,935 [net of discount of $472,065]. The $200,000
paid at closing was used to purchase inventory and a portion of intangible
assets.
The Accompanying Notes are an Integral Part of These Financial Statements.
F-7
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[1] Principles of Organization and Business
Niche Pharmaceuticals, Inc., a Delaware corporation [the "Company"], was
incorporated pursuant to the laws of the State of Delaware on October 14, 1996.
The Company is the successor to Niche Pharmaceuticals, Inc., a Texas corporation
["Niche Pharmaceuticals - Texas"] which was incorporated pursuant to the laws of
the State of Texas in 1991. The Company was organized to enable Niche
Pharmaceuticals - Texas to merge with and into the Company in November 1996 in
order to effectuate a reincorporation in the State of Delaware. Pursuant to the
terms of the merger, the Company effectuated a 1.25 to 1 stock split of all
shares of common stock on the date of merger. These financial statements have
been prepared giving retroactive effect to the merger.
The Company manufactures, through contract manufacturers, markets and
distributes non-prescription pharmaceutical and nutraceutical dietary
supplement products. The pharmaceutical and nutraceutical industry is
characterized by extensive research efforts, rapid technological progress and
intense competition. There are many public and private companies, engaged
in developing and marketing pharmaceuticals and nutraceuticals, that represent
significant competition to the Company.
[2] Summary of Significant Accounting Policies
[A] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[B] Economic Dependency - The Company has an exclusive agreement with a
pharmaceutical manufacturer and distributor for the manufacture and packaging of
one of its products. The initial term of the such agreement expires in July 1997
and is automatically renewable for successive two year terms, unless written
notice of termination is given by either party at least one year prior to the
expiration of the initial or a successive term. Neither party has given any
notice of termination. Accordingly, the expiration date of this agreement has
been extended to July 1999. The terms of this agreement provide that, in the
event of early termination by such manufacturer and distributor, such
manufacturer and distributor will, at the Company's request, provide the Company
with a supply of up to the total amount of product purchased by the Company in
the previous year. If the relationship with such manufacturer and distributor
were to cease, the Company believes, but cannot assure, that it will be able to
engage an alternative manufacturer on comparable terms to such agreement to
manufacture such product at comparable levels.
The Company's other product is being manufactured by another manufacturer and
distributor, pursuant to an agreement which expires on December 31, 1996.
Pursuant to such agreement, the manufacturer and distributor is obligated to
manufacture this product in sufficient quantity to meet the Company's projected
sales needs, which the Company estimates to be approximately $1,000,000 for
1997. By the second quarter of 1997, the Company expects to engage another
third party contractor to manufacture this product. The Company is currently
investigating such manufacturing options and believes, but cannot assure, that
there will be no difficulty engaging another contract manufacturer.
The Company earned a substantial portion of its revenues from four customers
during each of the years ended December 31, 1995 and 1994. Revenues from these
customers were approximately 25%, 16%, 13% and 13% of operating revenues,
exclusive of amounts received in settlement with a supplier [See Note 14] in
1995 and 22%, 16%, 11% and 10% of operating revenues in 1994. Amounts included
in accounts receivable from these customers were $13,118, $5,198, $5,045 and
$7,417 at December 31, 1995. The loss of any one of these customers may have a
substantial adverse effect on the Company.
F-8
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[C] Concentration of Credit Risk - The Company extends credit to its customers
which results in accounts receivable arising from its normal business
activities. The Company does not require collateral from its customers, but
routinely assesses the financial strength of the customers and, based upon
factors surrounding the credit risk of the customers, believes that its
receivable credit risk exposure is limited. Such estimate of the financial
strength of the customers may be subject to change in the near term.
[D] Inventories - Inventories, which consist solely of finished products, are
stated at the lower of cost or market. Cost is determined on the first-in,
first-out [FIFO] method.
[E] Property and Equipment - Property and equipment are recorded at cost.
Expenditures for normal repairs and maintenance are charged to earnings as
incurred. When assets are retired or otherwise disposed of, their costs and
related accumulated depreciation are removed from the accounts and the resulting
gains or losses are included in operations. Depreciation and amortization are
recorded using the straight-line method over the shorter of the estimated lives
of the related asset or the remaining lease term. Estimated useful lives are as
follows:
Office Equipment 5 - 7 Years
Computer Equipment 5 Years
Furniture and Fixtures 5 - 7 Years
Leasehold Improvements 5 Years
[F] Intangibles - Intangibles include contract rights, trademarks, patents,
educational materials, clinical data, covenants-not-to compete and organization
costs. Amortization of intangibles is being recognized on the straight-line
method based upon the economic lives of the assets. The Company continually
reevaluates the carrying values of these assets, by reviewing the estimated
useful lives to determine whether current events and circumstances warrant
adjustments to the carrying value and estimates of useful lives. At this time,
the Company believes that no significant impairment of these assets has occurred
and that no reduction of the estimated useful lives is warranted. Estimated
useful lives are as follows:
Contract Rights 15 Years
Trademarks 10-15 Years
Patent 17 Years
Educational Materials, Clinical Data and
Covenant-not-to Compete 7 Years
Organization Costs 5 Years
[G] Deferred Offering Costs - These costs represent legal and accounting fees in
connection with the proposed public offering of the Company's common stock.
These costs will be charged to additional paid-in capital upon completion of the
proposed public offering. If the offering is not completed, these costs will be
expensed.
[H] Earnings Per Share - Earnings per share are based on 1,101,500 shares issued
for all periods presented including the 100,000 shares in the bridge financing
[See Note 16A]. Shares or equivalents issued within a one year period prior to
the initial filing of the initial public offering of the registration statement
are treated as outstanding for all periods presented.
[I] Advertising and Marketing - Advertising and marketing expense, primarily
comprised of print media distributed to current and potential customers, is
expensed as incurred. Advertising and marketing expense amounted to $40,397 and
$48,206 for the years ended December 31, 1995 and 1994, respectively.
F-9
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[J] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize compensation expense
related to stock options and similar equity instruments issued to employees,
which is based on the difference between the fair market value of the common
stock and the exercise price at the grant date.
[K] Cash and Cash Equivalents - The Company considers all highly liquid invest-
ments with maturities of three months or less when purchased to be cash
equivalents. The Company had no cash equivalents at December 31, 1995.
[3] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplates continuation of the
Company as a going concern, and the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. As of December
31, 1995, the Company had an accumulated deficit of $617,961 and a working
capital deficit of $67,504.
The ability of the Company to continue as a going concern is dependent upon the
success of the Company's marketing efforts and its ability to obtain sufficient
funding to continue operations. The Company has been funded through December 31,
1995 by loans from its principal stockholders, and through third party debt
which has been guaranteed by various stockholders and by the sale of stock [See
Notes 7, 8 and 9]. The ability of the Company to effect its transition,
ultimately, to profitable operations is dependent upon obtaining adequate
financing through a private placement or initial public offering and achieving
an increase in revenues. The Company has acquired a product that has proven
market acceptance and management plans to increase revenues by substantially
increasing its marketing activities both in and outside the United States.
Management believes that these plans can be effectively implemented in the next
twelve months. There can be no assurance that management will be successful in
these endeavors. The Company's ability to continue as a going concern is
dependent on the implementation and success of these plans. The financial
statements do not include any adjustments in the event the Company is unable to
continue as a going concern [See Notes 16A and 16B].
[4] Product Acquisition and Financing
On October 17, 1995, pursuant to an agreement between a pharmaceutical
manufacturer and the Company, the Company purchased all rights, title and
interest to a product manufactured by such pharmaceutical manufacturer. Such
agreement requires the Company to pay the greater of $1,700,000 [$200,000 was
paid at the date of acquisition] or 20% of the annual product sales payable over
a five year installment period with a maximum payment of $3,000,000. Such
installment plan did not include a stated rate of interest, therefore, the
payments were discounted to a net present value of $1,227,935 using an imputed
interest rate of 11% which resulted in a discount of $472,065 that will be
amortized over the life of the agreement using the effective interest method.
The note is guaranteed by the principal stockholder of the Company.
The following is a summary of the minimum payments required to be made March 31
of each year indicated below under this agreement as of December 31, 1995:
Years Ending Minimum Payment Due
December 31,
1997 $ 200,000
1998 250,000
1999 300,000
2000 350,000
2001 400,000
--------------
Total 1,500,000
Less: Unamortized Discounts 453,220
Net Present Value Due $ 1,046,780
--------------------- ==============
F-10
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[4] Product Acquisition [Continued]
The cost of this product was allocated to the following assets:
Asset Amount
Inventory $ 140,531
Trademark 300,000
Educational Materials 50,000
Clinical Data 200,000
Covenant-not-to Compete 100,000
Contract Rights 437,404
--------------
Total $ 1,227,935
----- ==============
Interest expense from discount amortization amounted to $18,845 for the year
ended December 31, 1995.
[5] Property and Equipment
Property and equipment consist of the following at December 31, 1995:
Furniture and Fixtures $ 21,289
Machinery and Equipment 19,283
Leasehold Improvements 7,527
--------------
Total 48,099
Less: Accumulated Depreciation 27,926
Total $ 20,173
----- ==============
Depreciation expense for the years ended December 31, 1995 and 1994 amounted to
$5,250 and $4,148, respectively.
[6] Intangibles
Intangibles consist of the following at December 31, 1995:
Original Cost
Contract Rights $ 442,404
Organizational Costs 122,039
Patents 84,000
Trademarks 303,000
Educational Material 50,000
Clinical Data 200,000
Covenant-not-to Compete 100,000
--------------
Total 1,301,443
Less: Accumulated Amortization (161,277)
Total $ 1,140,166
----- ==============
Amortization expense for the years ended December 31, 1995 and 1994 amounted to
$46,376 and $29,849, respectively.
F-11
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[7] Long-Term Debt
Long-term debt consists of a note payable to a bank, in the original principal
amount of $250,000 payable with interest currently calculated at the prime rate
plus 2.25% [10.75% at December 31, 1995]. Such interest rate is adjusted
annually. The amount due is payable in monthly installments of approximately
$4,400 including principal and interest through April 1999. The note is
collateralized by the Company's accounts receivable, inventory, working capital,
intangibles and the common shares of the Company held by its principal
stockholder. In addition, the repayment of the note is guaranteed by the
Company's principal stockholder and, in part, by the United States Small
Business Administration.
Long-term debt consists of the following at December 31, 1995:
Total Long-Term Debt $ 144,060
Less: Current Portion 40,381
--------------
Total $ 103,679
----- ==============
At December 31, 1995, aggregate maturities of long-term debt are as follows:
Year Ending Amount
December 31,
1996 $ 40,381
1997 42,663
1998 48,683
1999 12,333
--------------
Total $ 144,060
----- ==============
Interest expense on this debt for the years ended December 31, 1995 and 1994 was
$17,747 and $17,340, respectively.
[8] Note Payable - Bank
Pursuant to an agreement dated October 11, 1995, the Company borrowed $300,000
from a bank, evidenced by a note payable. The note bears interest at the bank's
prime rate plus 1% [calculated at 9.50% at December 31, 1995]. Interest is due
quarterly and the note matures on October 11, 1996 [See Notes 9 and 15C]. The
note payable is unsecured and guaranteed by a stockholder of the Company. The
stockholders' notes payable are subordinated to this debt. Interest expense on
this note for the year ended December 31, 1995 was $6,600. The weighted average
interest rate in this short-term debt was 9.5% for the year ended December 31,
1995.
[9[ Notes Payable - Stockholders December 31, 1995
Unsecured note to stockholder, interest at
10% per annum, made January 11, 1991 in the
original amount of $500,000, due January 11,
1998 with automatic renewal of one year
periods until written notice of termination
at least 30 days prior to the end of the
initial or any renewal term. $ 352,865
Unsecured note to stockholder, interest at
10% per annum, made December 10, 1991 in the
in the original amount of $37,500, due January
10, 1998, unless accelerated pursuant to the
terms of the agreement. 37,500
------
Total - Forward $ 390,365
F-12
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[9] Notes Payable - Stockholders
December 31, 1995
Total - Forwarded $ 390,365
Unsecured note to stockholder, interest at 10%
per annum, made December 10, 1991 in the
original amount of $37,500, due January 10,
1998, unless accelerated pursuant to the terms
of the agreement. 37,500
Unsecured note to stockholder, interest at 10%
per annum, made December 10, 1991 in the
original amount of $37,500, due January 10,
1998, unless accelerated pursuant to the terms
of the agreement. 37,500
----------
Total Notes Payable - Long-Term $ 465,365
------------------------------- ==========
At December 31, 1995, aggregate maturities of notes payable - stockholders is as
follows:
Year Ending
December 31,
1996 $ --
1997 --
1998 465,365
---------------
Total $ 465,365
----- ===============
These notes are subordinated to the note payable - bank [See Note 8].
Interest expense on the notes for the years ended December 31, 1995 and 1994 was
$48,608 and $49,934, respectively.
[10] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value, to
the extent practicable, for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed therein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization on settlement. For certain financial instruments,
including cash, accounts receivable, payables and accrued expenses, it was
estimated that the carrying value approximates fair value because of the near
term maturities of such obligations. Management believes that the fair value of
the Company's stockholders' debt approximates its carrying value. The fair value
of the product financing, long-term debt and notes payable - bank is based on
current rates at which the Company could borrow funds at similar rates and
maturities. The carrying value of long-term debt approximates fair value.
[11] Income Taxes
For financial reporting purposes, at December 31, 1995, the Company has net
operating loss carry forwards of $595,000 expiring by 2010. The Tax Reform Act
of 1986 includes provisions which may limit the net operating loss carry
forwards available for use in any given year if certain events occur,
including significant changes in stock ownership. If the Company is
successful in completing an initial public offering [See Note 15E],
utilization of the Company's net operating loss carry forwards to offset
future income may be limited due to income tax regulations regarding
substantial changes in company ownership.
F-13
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[11] Income Taxes [Continued]
The expiration dates of net operating loss carry forwards are as follows:
December 31, Amount
2006 $ 114,000
2007 289,000
2008 126,000
2009 52,000
2010 14,000
----------
Total $ 595,000
----- ==========
A deferred tax asset arising primarily from the benefits of net operating loss
carry forwards of approximately $202,000 is offset by an allowance of $202,000
due to the uncertainty of its ultimate realization.
[12] Stockholders' Deficiency
The Company originally sold 20,000 shares of stock at $5 per share [50,000
shares as adjusted for stock splits] during the period November 1, 1994 through
March 31, 1995 in a private placement.
During 1994, the Board of Directors declared a 3.8 to 1 split. In addition, in
February 1996, the Board of Directors declared a 2 to 1 stock split for
stockholders of record. In addition, as part of the reincorporation of the
Company in Delaware, the Company also effectuated a 1.25 to 1 stock split.
The financial statements have been retroactively restated to reflect all such
stock splits which reduced the par value of the Company's shares from $.01
to $.00105.
Preferred Shares - Pursuant to the Company's Certificate of Incorporation [the
"Certificate of Incorporation"], preferred stock may be issued by the Company in
the future without stockholder approval and upon such terms as the Board of
Directors may determine. The rights of holders of common shares will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
shares that may be issued in the future.
[13] Other Related Party Transactions
Until September 1996, the Company leased its office and warehouse space on a
month to month basis from its president and principal stockholder [See Note
15B]. Rental expense for the office and warehouse for the years ended
December 31, 1995 and 1994 was $16,749 and $15,261, respectively.
[14] Commitments and Contingencies
The Company reached a settlement in its lawsuit with a supplier in which the
Company sought a recovery from such supplier for damages it sustained as a
result of conduct on the part of such supplier pertaining to one of its
products. The Company received net proceeds of $66,147 during 1995 and agreed to
terminate all litigation in return. Such amount has been included in revenue for
the year ended December 31, 1995.
The Company leases equipment for its operations under five (5) noncancelable
operating leases expiring at various dates through November 1998.
F-14
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[14] Commitments and Contingencies [Continued]
Future minimum rental payments under the above noncancelable operating leases as
of December 31, 1995 are as follows:
Years ending Amount
December 31,
1996 $ 39,735
1997 36,293
1998 30,806
----------
Total $ 106,834
----- ==========
[15] Subsequent Events
[A] 1996 Stock Option Plan - In February 1996, the Board of Directors of the
Company adopted, and the stockholders of the Company approved the adoption of,
the 1996 Stock Option Plan [the "1996 Stock Plan"] which provides for the grant
of options for the purchase of up to 131,250 common shares of the Company.
In February 1996, pursuant to the 1996 Stock Plan, the Company granted to two
directors of the Company options to purchase 12,500 and 75,000 common shares,
respectively, at an exercise price of $1.50 per share.
In July 1996, pursuant to the 1996 Option Plan, the Company granted to each of
two other directors options to purchase 12,500 common shares at an exercise
price of $1.50 per share. The options vest to the extent of 20% per year over a
period of five years commencing in July 1997 and terminate in July 2006.
[B] Lease of Premises - In September 1996, the principal stockholder sold the
office and warehouse premises to a third party [See Note 13]. Effective
September 1996, the Company entered into a five (5) year noncancellable
operating lease with the new owners of the same premises. The lease, which
expires in August of 2001, requires an annual rental of $24,000 for the first
year, with annual increases of $2,400 each year for the next three (3) years.
The Company has the option to renew the lease for a period of up to five (5)
years at a monthly rental of $2,600. The Company pays property taxes, insurance,
utilities and certain repairs related to the leased property.
[C] Renewal of Note Payable - Bank - On October 11, 1996, this note was renewed
by the bank with a maturity date of October 11, 1997, with terms similar to the
original note payable [See Note 8].
[16] Subsequent Events [Unaudited]
[A] Bridge Loan - In December 1996, the Company borrowed $100,000 in a bridge
loan financing from unaffiliated persons at the rate of 10% simple annual
interest. Such loans are to be repaid at the earlier of the closing of the
proposed public offering or the first anniversary date of the bridge loan
closing. In further consideration of the bridge loan, the Company issued 100,000
shares of common stock. The fair value of the common stock at the date of
issuance, of approximately $400,000 will be recorded as a deferred financing
cost and amortized over the lesser of a one year term or the life of the debt.
The shares of common stock will be registered as part of the proposed initial
public offering.
F-15
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[16] Subsequent Events [Unaudited] [Continued]
[B] Proposed Initial Public Offering - The Company is offering for public sale
1,300,000 shares of common stock at a price of $5.00 per share. Although no
assurance can be given that the proposed initial public offering will be
successful, the Company intends to utilize the net proceeds from the proposed
initial public offering of approximately $5,240,000 for the partial repayment of
debt, product acquisition, research and development, hiring of additional
personnel and working capital purposes.
[C] 1996 Senior Executive Stock Option Plan - This Plan provides for the grant
of options to a certain management group for the purchase of up to 405,000
common shares of the Company. The 1996 Executive Plan provides for the grant to
executives and directors of the Company options to purchase 405,000 common
shares of the Company, respectively, at an exercise price of $5.00 per share
[the "Executive Plan Options"]. The Executive Plan Options shall terminate in
2006 and vest in one-third increments in each of 1998, 1999 and 2000 following
the issuance of audited financial statements for the prior year, provided the
Company's cumulative pre-tax income from operations exceeds $300,000, without
giving effect to any charge to earnings resulting from an issuance of common
shares to bridge lenders [See Note 16A], $3,000,000 and $7,500,000 for the
fiscal years ending December 31, 1997, December 31, 1998 and December 31, 1999,
respectively [the "Cumulative Goals"]. In the event a particular Cumulative Goal
is not reached through December 31 of any given year, the particular installment
of such Executive Plan Options will nevertheless vest in a future year if the
Cumulative Goal for a succeeding year is met.
[D] 1996 Non-Executive Stock Option Plan - This Plan provides for the grant of
options to employees of the Company other than to eligible optionees under the
1996 Senior Executive Stock Option Plan to purchase up to 150,000 common shares.
No options have been granted under the 1996 Non-Executive Stock Option Plan.
[E] Consulting Agreement - Pursuant to the proposed underwriting agreement, the
Company anticipates entering into a three-year consulting agreement with the
underwriter to provide services with its mergers and acquisitions and general
business management. The fee for such services will be $100,000.
[F] Employment Agreement - The Company intends to enter into an employment
agreement with the President and Chief Executive Officer, and Executive Vice
President on the closing date of the initial public offering for an initial term
of three years, providing for a salary of $120,000 and $96,000, per annum,
respectively.
[G] Underwriter's Purchase Warrants - As a part of the consideration of its
services in connection with the Company's proposed initial public offering
described herein [See Note 16B], the Company has agreed to issue to the
underwriter, for nominal consideration, warrants to purchase up to 130,000
shares of common stock at an exercise price of 150% of the public offering price
of such shares, such warrants being exercisable for a three year period
commencing one year after the effective date of the proposed initial public
offering. The non-cash cost of such warrants, representing a cost of raising
capital, will be approximately $277,000 and will be recorded as a charge and
credit to stockholders' equity when the warrants are issued.
[H] Line of Credit - Related Party - In January 1997 the Company was extended a
$150,000 line of credit from a related party. $75,000 of this facility was
drawn upon in January 1997. Any amounts drawn on the line are to be repaid
on the first anniversary of the effective date of the initial public offering.
Interest is payable on demand at an annual rate of 10 percent. In further
consideration for the loan, the Company will issue warrants to purchase
30,000 shares of the Company's common stock. Such warrants become exercisable
for a five year period commencing on the first anniversary date of the initial
public offering at $6 per share.
F-16
NICHE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the nine months ended September 30, 1996 and 1995 is
Unaudited]
- --------------------------------------------------------------------------------
[16] Subsequent Events [Unaudited}{Continued}
[H] Line of Credit - Related Party [Continued} - The fair value of the warrants
at the date of issuance, of approximately $94,000, will be recorded as a debt
discount and will be amortized over the term of the debt into interest expense.
[17] Authoritative Pronouncements [Continued]
The Financial Accounting Standards Board ["FASB"] issued the Statement of
FInancial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in March of
1995, SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. The
Company implemented SFAS No. 121 on January 1, 1996. In addition, because the
long lived assets are deemed material to the total assets of the Company, an
impairment of such long lived assets would have a material impact on the
Company's financial statements. As of September 30, 1996, management does not
believe an impairment of such long lived assets exists.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The optional recognition requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company will continue to apply Opinion No. 25 in
recognizing its stock based employee arrangements. The disclosure requirements
of SFAS No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. The Company adopted the disclosure
requirements on January 1, 1996. SFAS 123 also applies to transactions in which
an entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. This requirement is effective for
transactions entered into after December 15, 1995.
[18] Unaudited Interim Statements
The financial statements as of September 30, 1996 and for the periods ended
September 30, 1996 and 1995 are unaudited. In the opinion of management, the
interim financial statements include all adjustments which are necessary in
order to make the interim financial statements not misleading. The results for
interim periods are not necessarily indicative of the results to be obtained for
a full fiscal year.
. . . . . . . . . . . . .
F-17
- ---------------------------------------
No dealer, salesman or other person
has been authorized to give any information or
to make any representations not contained in
this Prospectus and if given or made, such
information or representations must not be
relied upon as having been authorized by the
Company or the Underwriter. Neither the
delivery of this Prospectus nor any sale made
hereunder shall under any circumstances
create any implication that there has been no
change in the affairs of the Company since the
date hereof. This Prospectus does not
constitute an offer of any securities other than
the securities to which it relates or an offer to
any person in any jurisdiction in which such an
offer would be unlawful.
-----------
TABLE OF CONTENTS
Page
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Dilution.........................................
Capitalization...................................
Dividend Policy..................................
Bridge Financing.................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business.........................................
Management.......................................
Principal and Selling Stockholders...............
Certain Relationships and Related Transactions...
Description of Securities........................
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Additional Information...........................
Glossary.........................................
Financial Statements.............................
-------------
Until , 1997 (25 days after the
date of this Prospectus), all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
====================================================
58
1,300,000 Shares of Common Stock
NICHE PHARMACEUTICALS, INC.
------------
PROSPECTUS
S T E R L I N G F O S T E R
I N V E S T M E N T B A N K E R S
, 1997
===========================================
59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article X of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the Company and its stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by Section 102 of the Delaware General Corporation Law,
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the Delaware General Corporation Law (with respect to unlawful
dividend payments and unlawful stock purchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
Additionally, the Company has included in its Certificate of
Incorporation and its by-laws provisions to indemnify its directors, officers,
employees and agents and to purchase insurance with respect to liability arising
out of the performance of their duties as directors, officers, employees and
agents as permitted by Section 145 of the Delaware General Corporation law. The
Delaware General Corporation law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors, officers, employees and agents may be entitled under the
Company's by-laws, any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers, directors, employees and agents of
the Company for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
In connection with the Offering, the Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the Prospectus,
or any such amendment or supplement thereto.
The Company intends to obtain has liability insurance coverage for
its officers and directors in the amount of $1,000,000 per person.
Insofar as indemnification for liabilities arising under the securities act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
II-1
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection
with the issuance and distribution of the securities being registered, other
than underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee $ 2,712.10
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 21,000.00
Registrant's Counsel Fees and Expenses 125,000.00
Accountant's Fees and Expenses 35,000.00
Underwriter's Non-Accountable Expense Allowance 195,000.00
Underwriter's Consulting Fee 100,000.00
Printing Expenses 35,000.00
NASDAQ Listing Fees 7,500.00
Blue Sky Counsel Fees 35,000.00
Transfer Agent and Registrar's Fee and Expenses 2,000.00
Miscellaneous Expenses 49,787.90
------------
Estimated Total $610,000.00
Item 26. Recent Sales of Unregistered Securities.
The Company sold the following Common Shares during the past three
years. The number of Common Shares referred to herein gives effect to a 2 for 1
stock split on February 8, 1996, and a 1.25 for 1 stock split effective as of
October 15, 1996 in connection with the Company's reincorporation in the State
of Delaware.
During the period November 1994 through March 1995, the Company
sold the following number of Common Shares in a private offering, for $2.00
per share in cash, to the following persons in the years indicated below:
1994
- ----
Number of Aggregate
Common Cash
Name Shares Consideration
- ---- --------- -------------
Roger G. Boyer 2,500 $ 5,000
Frank E. Putt 2,500 5,000
Joseph A. Spinella 2,500 5,000
B.J. Shaw 2,500 5,000
Richard L. Shumate, Jr. 2,500 5,000
Billy J. Baxley 7,500 15,000
Allan Avery 7,500 15,000
------ -------
Total 27,500 $ 55,000
1995
- ----
Number of Aggregate
Common Cash
Name Shares Consideration
- ---- --------- -------------
David A. Wang 2,500 5,000
Ronald Tennissen 2,500 5,000
Don J. Teague 2,500 5,000
W. Craig Carlisle 2,500 5,000
Ron L. Montgomery 2,500 5,000
Robert T. Meyer 2,500 5,000
Allan Avery 7,500 15,000
------ ------
Total 22,500 $ 45,000
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In December 1996, the Company borrowed $100,000 from Dominant
Construction Corp. (the "Bridge Lender") in a Bridge Financing transaction. In
consideraton for making the loan, the Company issued to the Bridge Lender
100,000 Common Shares.
In January 1997, the Company entered into a Credit Agreement with an
affiliate of Allan R. Avery which provided the Company with a $150,000 credit
facility of which the Company has borrowed $75,000. In consideration for
providing the credit facility, the Company issued Mr. Avery's affiliate a
warrant to purchase 30,000 Common Shares of the Company at an exercise price of
$6.00 per share, such warrant being exercisable for a period of five years
commencing on the first anniversary date of the Prospectus included in this
Registration Statement.
All the foregoing transactions were private transactions not
involving a public offering and were exempt from the registration provisions of
the Act pursuant to Section 4(2) thereof. Except as otherwise indicated below,
sales of the Common Shares were without the use of an underwriter, and the
certificates evidencing the securities relating to the foregoing transactions
bear restrictive legends permitting the transfer thereof only upon registration
of such securities or an exemption under the Act.
The Underwriter of this Offering acted as placement agent for the
Company in connection with the Bridge Financing on a "best efforts, all or none"
basis. The Underwriter received a placement fee of 7% of the gross proceeds of
the bridge financing, or $7,000. The Company also paid the fees and
disbursements of the Underwriter's counsel in connection with representing the
Underwriter in its capacity of placement agent in the Bridge Financing
transaction.
Item 27. Exhibits.
Exhibit
Number Title of Exhibit
------ ----------------
1.1 Form of Underwriting Agreement by and between the Company and the
Underwriter.
1.2 Form of Financial Consulting Agreement between the Underwriter and
the Company.
2.1 Agreement of Merger between the Company and Niche Pharmaceuticals,
Inc., a Texas corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 By-Laws of the Company.*
4.1 Specimen Common Share Certificate.
4.2 Form of Underwriter's Common Share Purchase Warrant.
5.1 Opinion of Certilman Balin Adler & Hyman, LLP, counsel for the
Company.
10.1 Loan Agreement, dated January 11, 1991, between Stephen F. Brandon
and the Company.
10.2 $500,000 Promissory Note (the "Brandon Note"), dated January 11,
1991, by the Company to Stephen F. Brandon.*
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10.3 Letter Agreement dated November 22, 1996, between Stephen F. Brandon
and the Company, extending the payment date of the Brandon Note to
January 11, 1998.*
10.4 Authorization and Loan Agreement among the U.S. Small Business
Administration (dated January 9, 1992), the Company (dated April 8,
1992), and First National Bank of Grapevine (dated April 8, 1992).*
10.5 $250,000 Promissory Note, dated April 8, 1992, of the Company to
First National Bank of Grapevine.*
10.6 $300,000 Promissory Note, dated October 11, 1996, of the Company to
Mercantile Bank of Kansas City.*
10.7 Purchase Agreement, dated October 17, 1995, between the Company and
Dow Hickam Pharmaceuticals, Inc.*
10.8 Lease, dated July 30, 1996, between Eva L. Zweifel Huntsman and the
Company.*
10.9 Third Party Manufacturing Agreement between the Company (dated
December 24, 1991) and Schering Corporation (dated January 27,
1992)*
10.10 Form of Employment Agreement, between the Company and Stephen F.
Brandon.*
10.11 1996 Stock Option Plan, as amended.*
10.12 1996 Senior Executive Stock Option Plan.
10.13 1996 Non-Senior Executive Stock Option Plan.
10.14 Credit Agreement, dated January 20, 1997, between GEM
Communications, Inc. and the Company.
10.15 Promissory Note, dated January 20, 1997, by the Company to GEM
Communications, Inc.
10.16 Common Share Purchase Warrant, dated January 20, 1997, isseud to
GEM Communications to purchase 30,000 Common Shares.
23.1 Consent of Moore Stephens, P.C., independent certified public
accountants.
23.2 Consent of Certilman Balin Adler & Hyman, LLP (included in its
opinion filed as Exhibit 5.1 hereto).
23.3 Consent of Sherman A. Drusin, the Underwriter's designee to the
Company's Board of Directors.
27.0 Financial Data Schedule.
_____________________
*Previously filed.
II-4
Item 28. Undertakings.
(a) Rule 415 Offering.
The undersigned Company will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(2) for determining liability under the Act, treat each post-effective
amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial
bona fide offering.
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers.
The undersigned Company will provide to the Underwriter, at the
closing specified in the underwriting agreement, Common Share certificates in
such denominations and registered in such names as required by the Underwriter
to permit prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions referred to in Item 24 of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling persons of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) Rule 430A.
The undersigned Company will:
(1) for determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company under Rule 424(b)(1) or (4)
or 497(h) under the Act, as part of this Registration Statement as of
the time the Commission declared it effective;
(2) for determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(e) Rule 424(c) Supplement; Post Effective Amendment.
The undersigned Company will, in the event the Underwriter in this
Offering enters into transactions with the Selling Stockholder, or
waives the "lock-up" restrictions applicable to such Selling
Stockholder's Common Shares:
(1) involving from 5% up to 10% of the Selling Stockholder's Common
Shares, file "sticker" supplements to the Prospectus pursuant to
Rule 424(c) under the Act; or
(2) involving over 10% of the Selling Stockholder's registered Common
Shares, file a post-effective amendment to the Registration
Statement.
>
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Roanoke, State of Texas, on January 28, 1997.
NICHE PHARMACEUTICALS, INC.
By:/s/ Stephen F. Brandon
----------------------------------------
Stephen F. Brandon, President
Chief Executive Officer, and Treasurer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/Stephen Brandon President, Chief Executive January 28, 1997
Stephen F. Brandon Officer, Treasurer Principal
Accounting Officer and
Director
* Executive Vice President- January 28, 1997
Thomas F. Reed Corporate Development
and Director
* Vice President and Director January 28, 1997
Jean R. Sperry
* Director January 28, 1997
Allan R. Avery
* Director January 28, 1997
J. Leslie Glick
*By: /s/ Stephen F. Brandon
- --------------------------
Stephen F. Brandon
Attorney-in-Fact
II-7